<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________.
COMMISSION FILE NUMBER: 001-12063
ROCKY MOUNTAIN INTERNET, INC
----------------------------------------------------
Exact name of Registrant as specified in its charter
DELAWARE 84-1322326
- -------- -----------
State or other jurisdiction of IRS Employer
incorporation or organization Identification
1099 18TH STREET, SUITE 3000 DENVER COLORADO 80202
- --------------------------------------------- ------
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: 303-672-0700
------------
Former name, former address and former fiscal year, if changed since last
report: NA
Indicate by check mark whether the Registrant (1) has filed all annual,
quarterly and other reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter periods that the Registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
--- ---
As of July 31, 1997, Rocky Mountain Internet, Inc. had 5,067,307 shares of
common stock, $.001 par value, outstanding.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
December 31, June 30,
1996 1997
(Note) (Unaudited)
------------ -----------
Current assets
Cash and Cash equivalents $ 348,978 $ 439,299
Investments 1,356,629 576,918
Trade receivables, less allowance for
doubtful accounts 12/31/1996 $115,700;
6/30/1997 $39,899 518,827 613,040
Inventories 91,047 29,260
Other 143,753 30,267
---------- ----------
$2,459,234 $1,688,784
---------- ----------
Property and equipment
Equipment 2,513,944 2,756,597
Computer software 202,501 231,737
Leasehold Improvements 127,877 172,921
Furniture, fixtures, and office equipment 413,678 431,013
---------- ----------
$3,258,000 $3,592,268
Less accumulated depreciation and
amortization 403,023 767,871
---------- ----------
$2,854,977 $2,824,397
---------- ----------
Other assets
Customer Lists 145,444 529,465
Deposits 80,512 94,384
---------- ----------
$ 225,956 $ 623,849
---------- ----------
$5,540,167 $5,137,030
---------- ----------
---------- ----------
Note: The consolidated Balance Sheet information as of December 31, 1996 has
been derived from the Company's audited financial statements appearing
in Form 10-KSB previously filed with the U.S. Securities and Exchange
Commission.
See Notes to Consolidated Financial Statements
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ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
1996 1997
(Note) (Unaudited)
----------- ------------
Current liabilities
Note payable $ 4,250 $ 499,250
Current maturities of long-term debt and
obligations under capital leases 451,823 539,363
Accounts payable 425,160 1,437,639
Deferred revenue 218,121 256,983
Accrued payroll and related taxes 528,160 136,057
Other accrued expense 460,836 605,714
----------- ------------
Total current liabilities $ 2,088,350 $ 3,475,006
Long-term debt and obligations under capital
leases, less current maturities $ 1,134,380 $ 1,071,948
----------- ------------
Stockholders equity
Preferred stock, $.001 par value; authorized
1,000,000 shares; issued and outstanding
1996, 250,000 shares and 1997 250,000 shares $ 250 $ 250
Common stock, $.001 par value; authorized
10,000,000 shares; issued 1996 4,540,723
shares; 6/30/97 4,880,160 shares and
outstanding 1996 4,540,723 shares;
6/30/1997 4,848,346 shares 4,541 4,880
Additional paid-in capital 4,839,968 5,547,075
Treasury stock (42,000)
Accumulated deficit (2,527,322) (4,920,129)
----------- ------------
Total stockholders' equity $ 2,317,437 $ 590,076
----------- ------------
$ 5,540,167 $ 5,137,030
----------- ------------
----------- ------------
See Notes to Consolidated Financial Statements
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ROCKY MOUNTAIN INTERNET, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1996 1997 1996 1997
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue
Internet access and services $ 593,692 $ 1,332,071 $1,102,147 $ 2,645,785
Equipment sales 40,835 120,342 101,217 203,586
----------- ----------- ---------- -----------
634,527 1,452,413 1,203,364 2,849,371
----------- ----------- ---------- -----------
Cost of revenue earned
Internet access and services 122,491 490,155 211,326 927,265
Equipment sales 33,980 97,263 85,178 161,128
----------- ----------- ---------- -----------
156,471 587,418 296,504 1,088,393
----------- ----------- ---------- -----------
Gross Profit 478,056 864,995 906,860 1,760,978
Selling, general and administrative
expenses 850,189 1,908,932 1,525,919 3,617,237
Other operating expenses 334,371 334,371
----------- ----------- ---------- -----------
Operating (loss) income (372,133) (1,378,308) (619,059) (2,190,630)
Other income (expense)
Interest expense (44,074) (106,988) (67,569) (191,477)
Other Income (Expense) (5,268) 1,211 1,879 (4,754)
Interest income 2,813 6,009 2,813 18,637
Finance charges 11,115 229 11,115 416
----------- ----------- ---------- -----------
(35,414) (99,539) (51,762) (177,178)
----------- ----------- ---------- -----------
Net (loss) income before income taxes $ (407,547) $(1,477,847) $ (670,821) $(2,367,808)
Income tax expense 0 0 0 0
----------- ----------- ---------- -----------
Net (loss) income $ (407,547) $(1,477,847) $ (670,821) $(2,367,808)
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Primary and fully diluted loss per share
Net earnings (loss) per share $ (0.090) $ (0.298) $ (0.19) $ (0.477)
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
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ROCKY MOUNTAIN INTERNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
----------------------------
1996 1997
------------ ------------
Cash Flows from Operating Activities
Net (loss) income $ (670,821) $(2,367,808)
Items not requiring (providing) cash:
Depreciation and amortization 111,875 413,074
Changes in assets and liabilities:
Trade receivables (135,181) (94,213)
Inventories (24,424) 61,788
Other current assets 1,107 113,486
Accounts payable 131,504 1,012,478
Deferred revenue 30,863 38,862
Accrued payroll and related taxes 117,804 (392,103)
Other accrued expenses 127,305 144,879
----------- -----------
Net cash used in
operating activities $ (309,968) $(1,069,557)
----------- -----------
Cash Flows from Investing Activities
Proceeds from investments 779,711
Acquisition of ONE, Inc. assets (150,000)
Purchase of property and equipment (99,855) (200,950)
(Additions) deletions to deposits 49,905 (13,873)
----------- -----------
Net cash provided by (used in)
investing activities $ (49,950) $ 414,888
----------- -----------
Cash Flows from Financing Activities
Proceeds from notes payable 495,000
Proceeds from long-term debt 117,000 312,582
Proceeds from sale of preferred stock 406,000
Proceeds from sale of common stock 400,500
Additions to deferred offering cost (108,170)
Payment of Preferred Stock Dividend (25,000)
RMI stock purchase (42,000)
Payments on notes payable (12,729)
Payments on long-term debt and obligations
under capital leases (99,020) (396,092)
----------- -----------
Net cash provided by (used in)
financing activities $ 303,081 $ 744,990
----------- -----------
Increase (decrease) in cash and cash
equivalents $ (56,837) $ 90,321
Cash and cash equivalents
Beginning 274,661 348,978
----------- -----------
Ending $ 217,824 $ 439,299
----------- -----------
----------- -----------
See Notes to Consolidated Financial Statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. - REPRESENTATION OF MANAGEMENT
The interim financial data is unaudited; however, in the opinion of management,
the interim data includes all adjustments, consisting only of normal recurring
adjustments necessary for a fair statement on the results for the interim
periods. The financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principals have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading.
NOTE 2. - INVESTMENT
The Company has invested in Master Repurchase Agreements of US Treasury Notes as
follows;
DESCRIPTION MATURITY DATE INVESTMENT
----------- ------------- ----------
US Treasury Note Oct. 31, 1997 $ 276,918
Repurchase Number 96-1 Sept. 10, 1997 $ 300,000
NOTE 3. - LINE OF CREDIT
The Company has established a line of credit for $500,000 effective September
18, 1996 with a maturity of September 10, 1997. The line of credit is secured by
pledge of a $300,000 Master Repurchase Agreement of a US Treasury Note held with
the lender and by accounts receivable. $495,000 of the $500,000 line of credit
is currently drawn down. Additionally, as part of the acquisition of the
Information Exchange, the Company has an additional $4,250 drawn against another
line of credit.
NOTE 4. ACQUISITION OF ONLINE NETWORK ENTERPRISES, INC.
In January, 1997, the Company acquired the dedicated high speed and dial-up
subscribers from Online Network Enterprises, Inc. (ONE), headquartered in
Boulder, Colorado, a division of VR*1, Inc. The ONE acquisition netted RMI
approximately 47 dedicated and 732 dial-up subscribers and equipment valued at
approximately $24,700. The Company paid $150,000 cash and issued 116,932 shares
of the Company's common stock.
NOTE 5. PRIVATE PLACEMENT
The Company issued a Private Placement Memorandum on June 13, 1997 for the sale
of 600,000 Units. Each unit is sold for $4.00 and consists of two shares of
Common Stock, $.001 par value per share, and one Warrant. The $4.00 per Unit
purchase price is allocated $1.90 to each share of Common Stock and $.20 to the
Warrant. Each Warrant entitles the registered holder to purchase one share of
Common Stock at an exercise price of $3.00 per share. As of 6/30/97, gross
proceeds from the offering were $445,000 or 111,250 Units. Refer to Exhibit
10.11 - Private Placement Memorandum for additional information.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Certain information contained in this Form 10-QSB, including "Management's
Discussion and Analysis of Financial Condition and Results of Operations" ,
contain forward-looking statements. The forward-looking statements herein are
based on current expectations that involve a number of risks and uncertainties.
Such forward-looking statements are based on assumptions that the Company will
continue to design, market and provide successful new services, that competitive
conditions will not change materially, that demand for the Company's services
will continue to grow, that the Company will retain and add qualified personnel,
that the Company's forecasts will accurately anticipate revenue growth and the
costs of producing that growth, and that there will be no material adverse
change in the Company's business. In light of the significant uncertainties
inherent in the forward-looking information included in this Form 10-QSB, actual
results could differ materially from the forward-looking information contained
in this Form 10-QSB.
The Company is implementing an operating plan calling for growth through
expansion of existing business categories, expansion of capabilities through
implementation of a frame relay switch backbone, expanding World Wide Web page
hosting and creation, and additional opportunities that fit within the Internet
business.
Effective January 16, 1997, the Company acquired dial-up and dedicated access
subscribers from Online Network Enterprises, Inc. (ONE), a Boulder, Colorado,
based provider of Internet access and Web services for consideration consisting
of $150,000 of cash and 116,932 shares of the Company's common stock.
The Company may experience fluctuations in operating results in the future
caused by various factors, some of which are outside of the Company's control,
including general economic conditions, specific economic conditions in the
Internet access industry, user demand for the Internet, capital expenditures and
other costs relating to the expansion of operations, the timing and number of
customer subscriptions, the introduction of new services by the Company or its
competitors, the mix of services sold and the mix of distribution channels
through which those services are sold. In addition, the Company's expenses,
including but not limited to obligations under equipment leases, facilities
leases, telephone access lines, and Internet access are relatively fixed in the
short term, and therefore variations in the timing and amount of revenues could
have a material adverse effect on the Company's results of operations.
Termination Agreement - Joint Venture with Zero Error Networks
The Company and Zero Error Networks (ZEN), a Joint Venture partner signed a
"TERMINATION AGREEMENT" effective July 3, 1997, which affects four points of
presence (POP) located in Pueblo, Hayden, Leadville, and Alamosa, Colorado.
These POP's have been operated under a revenue and expense sharing agreement
between the two parties. The Termination Agreement calls for ZEN to operate the
Hayden, Leadville, and Alamosa, Colorado locations and receive the rights to the
customer base currently existing in those locations while the Company will
operate and maintain
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the customer base in Pueblo and surrounding areas. The transition is to occur
during the months of July and August, 1997. The Company has contracted for a
location (POP site) in Pueblo and installed approximately $35,000 of equipment
therein. The Termination Agreement includes a limited non-compete clause
wherein neither party may directly solicit the existing customer base of the
other for a period of one year. The net effect of the Termination Agreement
on net income is expected to be neutral in the shortrun and have a positive
long term result. The Pueblo revenues are expected to grow at a faster rate
than the other three POP's combined and the Company plans to focus additional
effort to selling dedicated access in the Pueblo market. See Exhibit 10.10
for specific terms and conditions of the agreement.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 AND 1997
The Company's revenues grew 129% from $634,526 to $1,452,413 for the three
months ended June 30, 1997 as compared to the comparable period in 1996. Listed
below is a breakdown of the revenue billing categories.
Three Months Ended
June 30,
---------------------------------
1996 1997 % Change
-------- ---------- --------
REVENUE
Dial-Up Service $349,239 $ 570,992 63%
Dedicated access Service 149,221 461,239 209%
Web Services 92,612 251,413 171%
Equipment 40,835 120,342 195%
Other 2,620 48,427 1748%
-------- ---------- ----
Total $634,527 $1,452,413 129%
-------- ---------- ----
-------- ---------- ----
Dial-Up Service
The Company's strategy is to provide an high quality service with few busy
signals. In order to assure this service level, the Company does not provide
any unlimited access service price plans during the business day, since these
plans have a tendency to congest the network. The Company does provide a range
of service offerings based on a set number of hours for a set rate with
additional hours billed as overage. The table below shows the composite
weighted average billing rate for full service Internet access by quarter for
1995, 1996, and 1997.
For the Three Months Ended
Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
$20.52 $20.42 $20.88 $21.02 $20.97 $20.33 $20.41 $20.50 $20.10 $20.04
The Dial-up business continues to experience growth based on reputation, trade
show attendance, and marketing by joint venture partners in outlying areas of
Colorado. Dial-up Service has been split approximately evenly between commercial
and residential customers throughout 1995, 1996, and 1997. Dial-Up revenues
increased from $349,240 to $570,990 or 63% from the 3 months ending June 30,
1996 to the 3 months ending June 30, 1997.
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RMI has established business alliances with five, locally-based unrelated
parties for the purpose of providing Internet services in secondary markets in
the State of Colorado. Each of these joint ventures are conducted under a
written agreement that provides for the locally-based party to provide equipment
and marketing services while the Company provides Internet access and
administrative services. Dial-up revenues based on these joint ventures
generated $76,539 in revenues for the three month period ending June 1996 and
$151,082 for the same period in 1997, for an increase of 97%. The joint venture
points of presence (POP) began in the second quarter of 1995 and grew to six
locations by the end of 1995 and eight locations by the end of 1996. Effective
July 3, 1997, the joint venture relationship with Zero Error Networks (ZEN) was
terminated. Under the termination agreement, the Company will operate the
Pueblo POP as a Company only location and ZEN will operate Alamosa, Leadville,
and Hayden locations. (See Item 4, paragraph 7 for additional details). The
Joint Venture in Grand Junction, Colorado was terminated by the Company
effective April 30, 1997. The marketing efforts by the locally-based joint
venture partner in this location were minimal and sales were less than $1,000
per month. The Company is pursuing options to operate this facility and add
dedicated as well as Dial-Up customers.
Dedicated Access Service
Dedicated access services are primarily provided to commercial customers and
include a wide range of connectivity options tailored to the requirements of the
customer. These services include private port (dedicated modem), Integrated
Services Digital Network (ISDN) connections, 56 Kbps frame relay connections,
T-1 (1.54 Mbps) frame relay connections, point to point connections, and T-3
(45 Mbps) or fractional T-3 connections. The Company also offers a colocation
service in which the customer's equipment is located in the RMI data center,
thereby providing access to the Internet directly through the Company's
connection.
Dedicated business has grown based principally on ISDN and High Speed circuit
growth. ISDN sales have grown from $6,800 to $150,300 from second quarter 1996
to second quarter 1997 for an increase of 2110%, while high speed circuits have
increased from $98,720 to $236,750 for the same periods for an increase of 140%.
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Web Services
Web services revenues are composed of Web page hosting and Web page
production. Web page hosting provides ongoing revenue from customers for whom
RMI hosts a Web site on Web servers in the RMI data center. All access made
to these Web Sites by the customer and the Internet community as a whole are
processed on the RMI servers. The advantage to customers is high speed
access to sites by their targeted audiences. The following is a summary of
the number of Web hosting customers as of the dates indicated:
Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
1 21 45 90 157 217 242 341 418 424
Web page hosting accounted for $52,600 of revenue in the second quarter of
1996 and $114,700 in the second quarter of 1997 revenue for an increase of
118%. The increase resulted from increases in the direct sales force,
increased server capacities and speed, and the increasing popularity of the
Web as a business tool.
Web page production increased from $40,000 for the second quarter 1996 to
$136,700 for the second quarter 1997 for an increase of 242%. The Company
increased the size of the Web production department as well as provided
customers more complex applications. The growth in Web hosting business plus
the activities of the Company's direct sales force helped to drive this part
of the business. The Company did not have a direct sales force until
December, 1995.
Other Revenue
Other revenue includes training revenue ($2,570 increased to $9,040), network
consulting ($0 increased to $10,750)and sales from the Information Exchange,
a voice messaging subsidiary ($0 increased to $27,400). The Information
Exchange was acquired in a stock transaction in late 1996.
Gross Profit
Gross profit consists of total revenue less the cost of delivering services
and equipment. The gross profit (exclusive of equipment sales) was 79.4% for
the three months ended June 30, 1996 and 63.2% for the same period in 1997.
In late December, 1996, the Company implemented a frame relay network using
Cascade switches. The switches are connected with a T-3 fiber optic network
to provide a high speed and highly reliable connection. The implementation
of this network has provided very high capacities for connections and has
resulted in a short term erosion of gross margin while the capacity is sold.
Future circuits sold on this network should have high yields because the
capacity is in place. Gross profits on equipment sales were 16.8% and 19.2%
for the 3 month periods ending June 30, 1996 and 1997 respectively. Sale of
equipment is provided as an accommodation to the Company's customers.
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Selling, General, and Administrative Expenses
Selling, general and administrative expenses increased by 125% from the three
months ended June 30, 1997 over the same period of 1996. This increase
resulted from the overall expansion of the business and is in keeping with
the strategy of building an organization capable of handling rapid growth and
expansion. Compensation and related personnel costs increased from $542,200
to $1,084,300 or 100% from the three month period in 1996 to 1997.
Personnel were added in all areas to expand the Company's sales efforts,
technical support, and administrative capabilities. The Company believes
that future revenue growth will not require a proportional increase in
personnel expense as the Company is positioned to experience economies of
scale. Advertising, trade shows, and marketing expenses increased from
$59,450 to $81,620 or 37% for the three months ended June 30, 1996 as compared
to the same period for 1997. Outside services expense increased from $21,060
to $148,400 or 605% for the second quarter of 1997 over the second quarter of
1996. The largest components of the increase are professional services for
consultants ($58,200), legal expenses ($33,800), and clerical accounting
staff and customer technical support staff hired on a temporary to permanent
basis ($36,520). Depreciation and amortization in regards to equipment,
software, furnishings, and capital leases increased by $149,800 or 201% due
to establishing a state of the art data center, implementing the frame relay
network with Cascade switches, expansion of equipment for dial up
connections, plus equipment for administrative use. Communication expense in
the form of 800 number lines, long distance, and general administration
increased to $72,900 or 70% for the three months ended June 30, 1997 to the
same period in 1996. This increase is reflective of the Company's growth
plus the increase of toll free 800 technical support service offered for dial
in customers.
Other Operating Expenses
During the three months ended June 30, 1997, the Company incurred one time
expenses for: a write-off of Joint Venture project costs in Grand Junction
and Burlington, Colorado in the amount of $45,113, a write down of inventory
for sale in the amount of $23,031, an expense of $158,994 relating to
termination of employees, and $107,233 of legal expenses relating to the
terminations and defense of the lawsuit referenced in Part II, Item 1 of this
document.
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
The Company's revenues grew 137% from $1,203,364 to $2,849,371 for the six
months ended June 30, 1997 as compared to the comparable period in 1996.
Listed below is a breakdown of the revenue billing categories.
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Six Months Ended
June 30,
--------------------------------------
1996 1997 % Change
---------- ----------- --------
REVENUE
Dial-Up Service $ 667,143 $1,166,678 75%
Dedicated access Service 275,083 808,832 194%
Web Services 147,096 467,886 218%
Equipment 101,217 203,586 101%
Other 12,825 202,389 1478%
---------- ---------- -----
Total $1,203,364 $2,849,371 137%
---------- ---------- -----
---------- ---------- -----
Dial-Up Service
The Dial up business continues to experience growth based on reputation,
trade show attendance, and marketing by joint venture partners in outlying
areas of Colorado. Revenues increased from $667,140 to $1,166,680 or 75% from
the 6 months ending June 30, 1996 to the 6 months ending June 30, 1997.
Dial-up Service has been split approximately evenly between commercial and
residential customers throughout 1995, 1996, and 1997.
RMI has established business alliances with five unrelated parties for the
purpose of providing Internet Services in secondary markets in the State of
Colorado. These joint venture agreements provide for the local party to
provide equipment and marketing services while the Company provides Internet
access and administrative services. Dial-up revenues based on these joint
ventures generated $138,290 in revenues for the six month period ending June
1996 and $283,240 for the same period in 1997 for an increase of 105%.
Dedicated Access Service
Dedicated business has grown based principally on ISDN and High Speed circuit
growth. ISDN sales have grown from $9,840 to $258,220 from the first half of
1996 to first half of 1997 for an increase of 2524%, while high speed
circuits have increased from $180,120 to $410,170 for the same periods for an
increase of 128%.
Web Services
Web page hosting accounted for $82,810 of revenue in the six months ending
June 30, 1996 and $218,300 for the same period in 1997 for an increase of
164%. The increase resulted from increases in the direct sales force,
increased server capacities and speed, and the increasing popularity of the
Web as a business tool.
Web page production increased from $64,280 to $249,580 or 288% for the first
six months of 1996 as compared to the same period in 1997. The Company
increased the size of the Web production department as well as provided
customers more complex applications. The growth in Web hosting business plus
the activities of the Company's direct sales force helped to drive this part
of the business.
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Other Revenue
Other revenue includes training revenue ($12,780 increased to $16,860),
consulting ($0 increased to $121,470)and sales from the Information Exchange
($0 increased to $63,700), a voice messaging subsidiary. The Information
Exchange was acquired in a stock transaction in late 1996.
Gross Profit
Gross profit consists of total revenue less the cost of delivering services
and equipment. The gross profit (exclusive of equipment sales) was 80.8% for
the six months ended June 30, 1996 and 65.0% for the same period in 1997. In
late December, 1996, the Company implemented a frame relay network using
Cascade switches. The switches are connected with a T-3 fiber optic network
to provide a high speed and highly reliable connection. The implementation
of this network has provided very high capacities for connections and has
resulted in a short term erosion of gross margin while the capacity is sold.
Future circuits sold on this network should have high yields because the
capacity is in place. Gross profits on equipment sales were 15.8% and 20.9%
for the 6 month periods ending June 30, 1996 and 1997 respectively. Sale of
equipment is provided as an accommodation to the Company's customers.
Selling, General, and Administrative Expenses
Selling, general and administrative expenses increased by 137% from the six
months ended June 30, 1997 over the same period of 1996. This increase
resulted from the overall expansion of the business and is in keeping with
the strategy of building an organization capable of handling rapid growth and
expansion. Compensation and related personnel costs increased from $932,300
to $2,042,250 or 119% from the six month period in 1996. Personnel
were added in all areas to expand the Company's sales efforts, technical
support, and administrative capabilities. The Company believes that future
revenue growth will not require a proportional increase in personnel expense
as the Company is positioned to experience economies of scale. Advertising,
trade shows, and marketing expenses increased from $106,850 to $129,300 or
21% for the six months ended June 30, 1997 as compared to the same period for
1996. Outside services expense increased from $44,100 to $315,550 or 615%
for the first half of 1997 over the first half of 1996. The largest
components of the increase are professional services for consultants
($104,980), legal expenses ($64,400), accounting services for the year end
audit and SEC reporting assistance ($44,580), and clerical accounting staff
and customer technical support staff hired on a temporary to permanent basis
($89,650). Depreciation and amortization in regards to equipment, software,
furnishings, and capital leases increased by $305,130 or 273% due to
establishing a state of the art data center, implementing the frame relay
network with Cascade switches, expansion of equipment for dial up
connections, plus equipment for administrative use. Communication expense in
the form of 800 number lines, long distance, and general administration
increased to $147,100 or 80% for the six months ended June 30, 1996 to the
same period in 1997. This increase is reflective of the companies growth
plus the increase of toll free 800 technical support service offered for dial
in customers.
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Other Operating Expense
During the six months ended June 30, 1997, the Company incurred one time
expenses for: a write-off of Joint Venture project costs in Grand Junction
and Burlington, Colorado in the amount of $45,113, a write down of inventory
for sale in the amount of $23,031, an expense of $158,994 relating to
termination of employees, and $107,233 of legal expenses relating to the
terminations and defense of the lawsuit referenced in Part II, Item 1 of this
document.
LIQUIDITY AND CAPITAL RESOURCES
The initial public offering was completed on September 5, 1996. Operating
cash flow and earnings for the remainder of 1997 are projected to be
negative. The Company continues to build infrastructure and human resources
to position itself to be a prominent Internet provider in the regional
market. The Company will utilize lease financing, as available, for capital
acquisitions. The Company is in the process of a Private Placement with a
stated value of $2,400,000 with a net to the Company of $2,160,000 if the
offering is fully subscribed. As of June 30, 1997, gross proceeds of
$445,000 had been received and as of July 31, 1997, an additional $447,000
had been received. The Company has incurred losses since inception and has
experienced negative operating cash flow in the first half of 1997. The
Company's operations used net cash of approximately $1,069,557 for this
period. The cash used by operating activities is primarily attributable to
the Company's continued expansion of its facilities and employee base in
anticipation of continued growth in revenues.
The Company acquired $334,270 of property and equipment during the first half
of 1997 primarily to complete the Operations Data Center and for various
other needs. Additionally, the Company acquired ONE, Inc. for a combination
of stock and cash. The cash portion was $150,000 of which, $24,700 was
allocated to equipment acquisition.
The Company has a bank line of credit in the amount of $500,000 of which
$495,000 is drawn at June 30, 1997. The line of credit is secured by a
pledge of a $300,000 treasury bill repurchase agreement and by the Company's
accounts receivable. The Company's office lease is also secured by a pledge
of a treasury bill of $250,000.
As of June 30, 1997, the Company had negative working capital of $1,786,222.
This included $436,299 of cash and cash equivalents and $576,918 of
investments in financial instruments convertible to cash. Trade receivables
as of that date were $613,040. Current liabilities as of that date were
approximately $3,475,006, including $1,437,639 of accounts payable, $539,363
of current maturities of long-term debt and capital lease obligations,
$136,057 of accrued payroll and related taxes, and $605,714 of accrued
expenses attributable primarily to a payable on office furniture, deferred
office rent, preferred stock dividend payable, accrual for unbilled circuit
costs, and amounts due joint venture partners pending cash collections. Also
included in current liabilities as of that date is $256,983 of deferred
revenue, which represents differences in the timing of payments by customers
and recognition of the related revenue.
Page 14
<PAGE>
RMI is an Internet Service Provider (ISP) with an high growth rate (as
discussed elsewhere in this document). The Company's growth is dependent on
building a strong infrastructure and hiring high quality sales, technical,
and administrative personnel. In order to build the infrastructure and
acquire the human resources needed to maintain an high growth rate, the
Company has operated with a negative cash flow from operations during 1996
and projects to continue to do so through 1997. The Company's cash
requirements are relatively fixed for the near term and the Company expects
to generate positive operating cash flows in 1998 if revenues continue to
increase according to expectations without any significant cost increases.
Should revenues not continue to increase according to expectations, in the
near term the Company may have to seek additional financing to fund operating
losses or implement additional reductions in operating expenses. Reductions
in operating expenses, if effected, could adversely affect revenues and
therefore not result in the expected increase in cash flow.
The Company's common stock is traded on the Nasdaq SmallCap Market. The
Directors of The Nasdaq Stock Market, Inc. recently proposed changes to
Nasdaq Listing Requirements. These changes are pending approval by the SEC.
If approved, the Nasdaq will give companies six months to comply with the new
requirements. A minimum maintenance standard of $2 million in net tangible
assets is included in these proposed changes. The current requirement is
$1,000,000 of net equity in order to be listed with Nasdaq. As of June 30,
1997, the Company had less than $2,000,000 in net tangible assets and less
than $1,000,000 of net equity. The Company is in the process of a Private
Placement in the amount of $2,400,000 of which $445,000 had been received by
June 30, 1997 and an additional $447,000 had been received as of July 31,
1997. The successful completion of the Company's private placement offering
would not satisfy the proposed Nasdaq Listing Requirements. Although the
existing Nasdaq Listing Requirements would be satisfied by the successful
completion of the private placement offering, there can be no assurances that
the Company can continue to satisfy these Listing Requirements. If the
proposed changes to the SmallCap Market listing criteria are approved by the
SEC and if the Company fails to meet such requirements, the Company's common
stock would no longer trade in the SmallCap Market, which would adversely
affect the liquidity and price of the Company's common stock. There can be
no assurance that the Private Placement will be completed in full. The
Private Placement Memorandum is attached as Exhibit 10.11.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On September 6, 1996, Robert Lewis and Storefronts in Cyberspace, L.L.C.,
filed a complaint in Denver District Court naming the Company and the
Colorado Rockies Baseball Club, Ltd., as defendants. All claims against the
Company have since been dismissed except for a breach of contract claim
seeking $25,000 in damages. The Company's management believes the breach of
contract claim is without merit and intends to vigorously defend against it.
The Company is not a party to any other litigation.
Page 15
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-B
Exhibit
Number Description of Exhibits
3.1 Certificate of Incorporation *
3.2 Bylaws of Rocky Mountain Internet, Inc. *
4.1 Form of Warrant Agreement dated September 5, 1996 between Rocky
Mountain Internet, Inc. and American Securities Transfer, Inc. *
4.2 Form of Subordinated Convertible Promissory Note *
4.3 Form of Lock-Up Agreement for Shareholders *
4.4 Form of Lock-Up Agreement for Preferred Stockholders *
4.5 Form of Lock-Up Agreement for Debenture Holders *
4.6 Form of Stock Certificate *
4.7 Form of Warrant Certificate *
10.1 Agreement of Lease between Denver-Stellar Associates Limited
Partnership, Landlord and Rocky Mountain Internet, Inc., Tenant **
10.2 Asset Purchase Agreement - Acquisition of Compunerd, Inc. **
10.3 Confirmation of $2.0 million lease line of credit **
10.4 Agreement between MCI and Rocky Mountain Internet, Inc. governing the
provision of professional information system development services for
the design and development of the MCI internal Intranet project
referred to as Electronic Advice. **
10.5 Sublease Agreement- 2/26/97 - 1800 Glenarm, Denver, Colorado
10.6 Acquisition of The Information Exchange ****
10.7 Asset purchase of On-Line Network Enterprises ****
10.8 1996 Incentive Compensation Plan - Annual Bonus Incentive ****
10.9 1997 Incentive Compensation Plan - Annual Bonus Incentive ****
10.10 TERMINATION AGREEMENT of joint venture between Rocky Mountain Internet,
Inc. and Zero Error Networks, Inc.
10.11 Private Placement Memorandum
16.1 Letter re change in certifying accountant ***
23.1 Consent of McGladrey & Pullen, LLP ****
23.2 Consent of Baird Kurtz & Dobson ****
27.1 Financial Data Schedule
* Incorporated by reference from the Company's registration statement
on Form SB-2 filed with the Commission on August 30, 1996,
registration number 333-05040C.
** Incorporated by reference from the Company's Form 10-QSB filing dated
11/14/96.
*** Incorporated by reference to the Company's Form 8-K filing dated
1/28/97.
**** Incorporated by reference to the Company's Form 10-KSB dated March
31, 1997
(b) Reports on 8-K. State whether any reports on Form 8-K were filed during
the last quarter of the period covered by this report, listing the items
reported, any financial statements filed and the dates of such reports.
None
Page 16
<PAGE>
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, hereunto
duly authorized.
Date: August, 14 1997 By: /s/ DAVID L. EVANS
-------------------------------------
David L. Evans
Chief Financial Officer
and Executive Vice President
/s/ ROY J. DIMOFF
-------------------------------------
Roy J. Dimoff
President and Chief Executive Officer
Page 17
<PAGE>
Rocky Mountain Internet, Inc.
EXHIBIT 10.10 TERMINATION AGREEMENT of joint venture between Rocky Mountain
Internet, Inc. and Zero Error Networks, Inc.
TERMINATION AGREEMENT
This Termination Agreement (this "Agreement") is entered into as of July 3,
1997 (the "Effective Date") by and between Rocky Mountain Internet, Inc., a
Colorado corporation ("RMI"), on the one hand, and Ken Swinehart, an individual,
and Zero Error Networks, Inc., a Colorado corporation ("ZEN") (collectively,
Ken Swinehart and ZEN will be referred to in this Agreement as "ZEN," and RMI
and ZEN will sometimes be referred to individually as a "Party" and collectively
as the "Parties").
RECITALS
A. RMI and Ken Swinehart entered into a Contract Agreement dated
January 25, 1995 (the "Contract Agreement") that provides for a joint venture
(the "Joint Venture") between RMI and Ken Swinehart for the provision of
Internet access and related services in a prescribed geographical area in
Central Colorado. Ken Swinehart has assigned his interest in the Joint
Venture to ZEN.
B. On April 5, 1997, Ken Swinehart, on behalf of himself and ZEN, sent
a written notice to RMI terminating the Contract Agreement and the Joint
Venture. Such termination was to be effective on July 5, 1997. In a letter
agreement between RMI and Ken Swinehart dated June 13, 1997 (the "Letter
Agreement"), the termination date of the Joint Venture was extended to July
15, 1997.
C. RMI and Swinehart now desire to agree to the terms and conditions
relating to the termination of the Contract Agreement and the Joint Venture.
AGREEMENT
In consideration of the mutual promises of the parties set forth is this
Agreement and other good and valuable consideration, the Parties agree as
follows:
1. TERMINATION OF RELATIONSHIP. As of the later of the Pueblo Transfer
Date or the Other Operations Transfer Date (each as defined below in Section
2), RMI and ZEN agree to terminate their joint venture relationship under the
Contract Agreement and to terminate the Contract Agreement and the Joint
Venture, each pursuant to the terms of this Agreement. As of such date of
termination, RMI and ZEN will no longer be considered for any purpose as joint
venturers or partners or parties to any similar relationship. In all dealings
with each other after such date of termination, RMI and ZEN will be viewed as
independent contractors dealing with each other at arm's length.
Exhibit 10.10 Page 1
<PAGE>
2. TREATMENT OF JOINT VENTURE OPERATIONS.
(a) (i) RMI will receive from the Joint Venture the right to
provide, and after the Pueblo Transfer Date (as defined in Section
2(a)(ii))will provide, all Internet services provided by the Joint Venture on
the Effective Date in Pueblo, Colorado (the "Pueblo Operations"). ZEN
relinquishes all right to provide such services, except that subject to
Section 5(d), ZEN may continue to provide dial-up services to THE PUEBLO
CHIEFTAIN.
(ii) As soon as practicable after the Effective Date, RMI will
lease office space in Pueblo, install in such office space all equipment
required to operate the Pueblo point-of-presence and transfer to RMI the
existing U.S. West Communications telephone access lines and telephone numbers
used by the customers of the Pueblo Operations on the Effective Date (the
"Pueblo Operations Customers"). The establishment of RMI's facilities and the
transfer of the telephone access lines and telephone numbers is anticipated to
occur no later than July 13, 1997, although such date could occur later (the
"Pueblo Transfer Date"). Up to and including the Pueblo Transfer Date, RMI
and ZEN will share revenues from and be liable for expenses attributable to
the Pueblo Operations as provided in the Contract Agreement; provided that
revenues attributable to conduct of the Pueblo Operations on or before the
Pueblo Transfer Date received by RMI or ZEN after September 3, 1997 will be
the sole property of RMI, and ZEN will have no right or claim to such
revenues. After the Pueblo Transfer Date, RMI will be entitled to all of the
revenues from, and bear sole responsibility for the expenses of, the Pueblo
Operations and ZEN will have no entitlement to such revenues nor bear any
liability for such expenses. RMI will indemnify and hold ZEN harmless from
all losses, expenses and claims (including reasonable expenses of attorneys
and other advisors) arising from the conduct of the Pueblo Operations by RMI
after the Pueblo Transfer Date and liabilities and claims described in Section
8 attributable to the conduct of Pueblo Operations on or before the Pueblo
Transfer Date.
(b) (i) ZEN will receive from the Joint Venture the right to
provide, and after the Other Operations Transfer Date (as defined in Section
2(b)(iii)) will provide all Internet services provided by the Joint Venture on
the Effective Date in Alamosa, Leadville and Hayden, Colorado (the "Other
Operations").
(ii) As of the Effective Date, ZEN will be considered the owner
of the telecommunications equipment (but not the telecommunications
facilities) that ZEN has purchased or leased and is using in connection with
the conduct of the Pueblo Operations and the telecommunications facilities and
equipment that ZEN has purchased or leased and is using in connection with the
conduct of the Other Operations, and to the extent RMI has legal title to such
facilities and equipment, RMI will transfer such legal title to ZEN upon ZEN's
request and at ZEN's expense. As of the Effective Date, RMI will be
considered the owner of all other telecommunications facilities and equipment
used in the conduct of the Pueblo Operations and the Other Operations and ZEN
agrees to take at RMI's expense all reasonable actions, if any, requested by
RMI to provide legal title to such facilities and equipment to RMI. Up to and
including the Other Operations Transfer Date (as defined in Section
2(b)(iii)), RMI and ZEN will share revenues from and be liable for expenses
attributable to the Other
Exhibit 10.10 Page 2
<PAGE>
Operations as provided in the Contract Agreement; provided that revenues
attributable to the conduct of the Other Operations on or before the Other
Operations Transfer Date received by RMI or ZEN after September 3, 1997 will
be the sole property of ZEN, and RMI will have no right or claim to such
revenues. After the Other Operations Transfer Date, Zen will be entitled to
all the revenues from, and will bear sole responsibility for the expenses of,
the Other Operations, and RMI will have no entitlement to such revenues or
bear any liability for such expenses. ZEN will indemnify and hold RMI
harmless from all losses, expenses and other claims (including reasonable
expenses of attorneys and other advisors) arising from the conduct of the
Other Operations by ZEN after the Other Operations Transfer Date and
liabilities and claims described in Section 8 attributable to the conduct of
the Other Operations on or before the other Operations Transfer Date. Any
expenses or other obligations outstanding as of the Effective Date with
respect to the Other Operations will be payable by RMI and ZEN as set forth in
the Contract Agreement.
(iii) Unless directed otherwise in writing by ZEN, RMI will
continue to provide the services provided by RMI on the Effective Date with
respect to the Other Operations until July 31, 1997, or if extended by ZEN,
until August 31, 1997 (provided that any such extension after July 31, 1997
shall be for a period of not less, nor more, than 31 days)(the "Other
Operations Transfer Date"). After the Other Operations Transfer Date, RMI will
have no obligation or liability to ZEN or any other Person to provide any
services with respect to the Other Operations. After the Other Operations
Transfer Date, ZEN will have sole responsibility to provide all services with
respect to the Other Operations, and will indemnify and hold RMI harmless from
all losses, expenses and claims (including reasonable expenses of attorneys
and other advisers) arising from the failure by RMI to provide such services
after the Other Operations Transfer Date.
(iv) For a period of one year after the Effective Date, ending
on July 3, 1998, RMI will use its commercially reasonable best efforts to
provide the service of forwarding E-Mail for ZEN's customers of the Other
Operations. The customers that will be forwarding E-mail will be determined
by ZEN and a list of such affected customers will be given by ZEN to RMI. ZEN
will pay RMI a fee for this service of $5 per E-mail address per month. If
such fee is not paid when due, as provided by RMI's standard billing
procedures, RMI will cease to provide such service. Prior to July 3, 1998,
ZEN may upon 30 days prior written notice to RMI direct RMI to cease providing
such service. After July 3, 1998, RMI will cease to provide such E-mail
service unless RMI agrees to continue such E-mail service on such terms and
conditions as RMI and ZEN then agree.
3. REIMBURSEMENT OF RMI EXPENSES. ZEN will reimburse RMI at a rate of
$75 per man hour for time spent by RMI personnel in establishing RMI's Pueblo
point-of-presence and in assisting ZEN in the transfer to ZEN of the
facilities and equipment relating to the Other Operations. RMI will provide
ZEN with written invoices documenting the time spent by RMI personnel that is
reimbursable under this Section 3 and ZEN will reimburse RMI in cash within 30
days of the receipt of such invoices.
Exhibit 10.10 Page 3
<PAGE>
4. NOTICE TO CUSTOMERS. Prior to the later of the Pueblo Transfer Date
and the Other Operations Transfer Date, RMI and ZEN will cooperate with each
other in sending written notices to all Joint Venture customers as of the
Effective Date that describes how customer accounts will be serviced after the
Effective Date. Neither RMI nor ZEN will send any such notice to any Joint
Venture customer without the other Party's approval of the contents of such
notice; provided that the failure of a Party to respond to a proposed notice
within five days of the receipt from the other Party of such proposed notice
will be deemed to be the approval by such Party of the proposed notice.
Notices sent by RMI and ZEN under this Section 4 need not be identical in form
or content. This Section 4 will cease to apply as of, and not survive, (a)
the Pueblo Transfer Date with respect to notices sent to Pueblo Operations
Customers and (b) the Other Operations Transfer Date with respect to notices
sent to Other Operations Customers.
5. NON-COMPETE AND CONFIDENTIALITY.
(a) Subject to the other provisions of this Section 5, for a period
of one year following the Effective Date, expiring on July 3, 1998, RMI will
not directly solicit the business of Persons who are customers of the Other
Operations on the Effective Date ("Other Operations Customers") or otherwise
actively interfere with ZEN's business relationship with the Other Operations
Customers.
(b) Subject to the other provisions of this Section 5, for a period
of one year following the Effective Date, expiring on July 3, 1998, ZEN will
not directly solicit the business of Pueblo Operations Customers or otherwise
actively interfere with RMI's business relationship with the Pueblo Operations
Customers.
(c) Section 5(a) and Section 5(b) will not prevent (i) RMI or ZEN
from providing services to Other Operations Customers or Pueblo Operations
Customers, as the case may be, if there is no violation of the
non-solicitation and non-interference requirements of such subsections, or
from providing services anywhere within or without the State of Colorado to
any Person other than an Other Operations Customer or a Pueblo Operations
Customer, or (ii) RMI or ZEN, as the case may be, from conducting general
advertising campaigns or other business solicitations of general application
within or without the State of Colorado and specifically within the
geographical areas served by the Pueblo Operations and the Other Operations.
Without limiting the foregoing, the Parties agree and acknowledge that they
each are permitted to compete with each other within the geographical area
served by the Pueblo Operations and the Other Operations, provided that such
competition does not violate Section 5(a) and Section 5(b).
(d) ZEN agrees that for a period of three years following the
Effective Date, expiring on July 3, 2000, ZEN will not provide THE PUEBLO
CHIEFTAIN with services of any kind that facilitate Web services, including
services relating to Web hosting, Web production, server collocation,
dedicated access connections, server consultation and software support.
(e) RMI and ZEN each agree that, for a period of five years from
the Effective Date, expiring on July 3, 2002, it will not recruit or contact
each
Exhibit 10.10 Page 4
<PAGE>
other's employees to solicit the employment of such employees.
(f) RMI and ZEN each agree that it will not make any disparaging or
critical remarks to any person about the other or their past business
relationships, including their relationship in the Joint Venture. RMI and ZEN
each will treat the subject matter of this Agreement as confidential and will
not disclose any matter relating to this Agreement to any Person without the
other Party's prior written consent, unless such disclosure is required by any
subpoena, court order, threat of legal duress or any other legal requirement,
in which case the disclosing Party will promptly notify the other Party of
such disclosure.
(g) RMI and ZEN each acknowledge that the scope of the restrictions
set forth in this Section 5 on its activities is reasonable in all respects,
including the duration and geographic scope and with respect to the nature of
the activities so restricted. If, however, any of the provisions of the
foregoing Section 5 are determined by a court to be unconscionable or
unreasonable in their application, the court will interpret and apply those
provisions so as to permit their application to the maximum extent permitted
by law.
6. POINTS OF CONTACT. RMI designates Mr. Kevin Loud as its point of
contact for ZEN in connection with all matters arising under this Agreement.
ZEN designates Ken Swinehart as its point of contact for RMI in connection
with all arising under this Agreement.
7. NEWS SERVICE. Upon the request of ZEN, RMI will prepare a written
estimate of the terms and conditions under which it would provide an
electronic news service to customers of ZEN.
8. PREPAID JOINT VENTURE ACCOUNTS. RMI and ZEN acknowledge and agree
that all amounts received prior to the Effective Date by the Joint Venture,
including amounts received for prepaid services, have been or will be
disbursed to RMI and ZEN pursuant to the Contract Agreement. In the event
that a Pueblo Operations Customer demands a refund of any prepaid services,
such refund will be the sole obligation of RMI. If an Other Operations
Customer demands a refund of any prepaid services, such refund will be the
sole obligation of ZEN. The indemnification obligations of the Parties set
forth in Section 2 will apply to liabilities or claims arising from the demand
of any such refunds.
9. REMEDIES OF THE PARTIES. In the event of a breach by RMI or ZEN of
this Agreement, in addition to any other rights that the other Party may have
pursuant to this Agreement, such other Party will be entitled, if it so
elects, to institute and prosecute proceedings under Section 10(d) at law or
in equity to obtain damages with respect to such breach or to enforce the
specific performance of this Agreement by the breaching Party or to enjoin
that Party from engaging in any activity in violation hereof. RMI and ZEN
each agree that a suit at law may be an inadequate remedy with respect to a
breach by a Party of this Agreement, and that upon such breach by a Party, the
other Party will be entitled, in addition to any other lawful remedies
available under Section 10(d), to injunctive relief.
Exhibit 10.10 Page 5
<PAGE>
10. MISCELLANEOUS PROVISIONS.
(a) The following rules of construction shall apply to this
Agreement:
(i) All section headings in this Agreement are for the
convenience of reference only and are not intended to qualify the meaning of
any Section.
(ii) Terms used with capital letters will have the meanings
specified. All personal pronouns used in this Agreement, whether used in the
masculine, feminine or neuter gender, include all other genders, the singular
shall include the plural, and vice-versa, as the context may require. The
word include (and any variation) is used in an illustrative sense rather than
a limiting sense. The word day means a calendar day.
(iii) The term "Person" means any individual, and any
partnership, corporation, limited liability company, trust or other legal
entity. The term "Affiliate" means, with respect to any Person, any other
Person Controlling, Controlled by or under common Control with such Person;
"Control" for such purpose means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities or voting
interests, by contract or otherwise.
(b) This Agreement may be amended by the parties in writing only.
(c) Except as expressly provided otherwise in this Agreement, a
Party and its Affiliates may engage in, or possess an interest in, other
business ventures of every nature and description, independently or with
others; and the other Party will have no right by virtue of this Agreement in
and to such independent ventures or to the income or profits derived
therefrom. Without limiting the foregoing, except as provided in this
Agreement, each Party may enter into agreements with third parties for the
provision of Internet services within or without the State of Colorado on such
terms and conditions as either of them may decide, and no such agreement will
be considered by the other party to be a violation by a Party or its
Affiliates of any duty or obligation owed to the other Party under this
Agreement.
(d) RMI and ZEN agree that any controversy or claim between or
among them arising out of or relating to this Agreement or the breach thereof
by any of them, shall be resolved by binding arbitration in accordance with
and governed by arbitration proceedings conducted under the auspices of and in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association (the "Rules"). The matter shall be decided by one arbitrator who
shall be appointed in accordance with the Rules. Either party may initiate
arbitration proceedings as provided in the Rules. Once the arbitrator is
appointed, the arbitrator shall have the power to enter injunctive relief,
including the issuance of temporary orders and the granting of preliminary
relief pending the outcome of arbitration, without the necessity of posting a
bond or other security. Unless otherwise agreed by the parties to the
arbitration, discovery shall be limited to no more than three depositions per
party and each party's right to request relevant documents prior to the
initiation of the first deposition conducted by such party.
Exhibit 10.10 Page 6
<PAGE>
All arbitration hearings conducted hereunder, and all judicial proceedings to
enforce any of the provisions hereof, shall take place in Denver, Colorado.
Such hearings shall be at the time and place within said city as is selected
by the arbitrator. Notice shall be given and the hearing conducted in
accordance with, and the arbitrator shall have the powers described in, the
Rules. At the hearing any relevant evidence may be presented by either party,
and the formal rules of evidence applicable to judicial proceedings shall not
govern. Evidence may be admitted or excluded in the sole discretion of the
arbitrator. The costs and expenses of arbitration, including the fees of the
arbitrators, shall be borne by the losing party, or in such proportions among
the parties to the controversy, as the arbitrator shall determine according to
the Rules.
(e) NOTWITHSTANDING THE PLACE WHERE THIS AGREEMENT MAY BE EXECUTED,
THE PARTIES EXPRESSLY AGREE THAT ALL THE TERMS AND PROVISIONS OF THIS
AGREEMENT WILL BE INTERPRETED, CONSTRUED AND APPLIED UNDER THE INTERNAL LAWS
OF THE STATE OF COLORADO (AND NOT THE LAWS PERTAINING TO CONFLICTS OR CHOICE
OF LAW).
(f) This Agreement will be binding upon the parties, their heirs,
executors, personal representatives, successors and assigns, and, as to rights
granted hereunder to such Persons, to a Party's Affiliates and their
successors and assigns.
(g) This Agreement may be executed in several counterparts, each of
which shall be treated as an original for all purposes, and all so executed
shall constitute one agreement, binding on all of the Parties, notwithstanding
that all the Parties are not signatory to the same counterpart. Any such
counterpart will be admissible into evidence as an original against the Person
who executed it. The execution and delivery of this Agreement by facsimile
will be sufficient for all purposes and will be binding upon any Person who so
executes.
(h) No consent or waiver, express or implied, by any Party of any
breach or default by any other Party in the performance of its obligations
hereunder will be deemed to be a consent to or waiver of any further or other
breach or default by such other Party in the performance of the same or any
other obligations of such Party. Failure on the part of any Party to complain
of any act, or failure to act, of any other Party or to declare any other
Party in default, irrespective of how long such failure continues, will not
constitute a waiver by such Party of its rights hereunder.
(i) In the event any sentence, paragraph or other provision of this
Agreement is declared by a court of competent jurisdiction to be
unenforceable, invalid or void for any reason, such sentence, paragraph or
other provision will be deemed severed from the remainder of the Agreement,
and the balance of the Agreement will remain in effect.
(j) All notices, claims, requests, demands, and other
communications hereunder required to be in writing will be deemed to be duly
given if: (a) personally delivered (including delivery by Federal Express or
other national recognized overnight courier or (b) sent by telecopy as follows:
If to RMI, to: Rocky Mountain Internet, Inc.
Exhibit 10.10 Page 7
<PAGE>
1800 Glenarm Place, Suite 1100
Denver, Colorado 80202
ATTENTION: Mr. Kevin R. Loud
With a copy to: Robert Mintz, Esq.
Sherman & Howard L.L.C.
633 Seventeenth Street, Suite 3000
Denver, Colorado 80202
If to ZEN, to: Zero Error Networks, Inc.
Attention: Mr. Ken Swinehart
315 State Avenue
Alamosa, CO 81181
With a copy to: Martin Gonzales, Esq.
P.O. Box 1616
Alamosa, Colorado 81101
or to such other address or addresses as the Person to whom notice is to be
given may have previously furnished to the other in writing in the manner set
forth above. Notices will be deemed given and received at the time of such
personal delivery or telecopying.
(n) This Agreement contains the entire understanding among the
Parties relating to the subject matter hereof and supersedes all prior written
or oral agreements among them, including the Letter Agreement, respecting the
subject matter addressed in this Agreement, unless otherwise provided herein.
There are no representations, agreements, arrangements or understandings, oral
or written, among the Parties relating to the subject matter of this Agreement
other than as provided herein.
IN WITNESS WHEREOF, this Agreement has been executed as of the day and
year first above written.
WITNESS:
ROCKY MOUNTAIN INTERNET, INC.
By: /s/ Kevin R. Loud
----------------------------------
Title: Vice President
Date: July 9, 1997
ZERO ERROR NETWORKS, INC.
By: /s/ Ken Swinehart
----------------------------------
Title: Manager
Date: July 10, 1997
/s/ Ken Swinehart
- --------------------------------------
KEN SWINEHART
Exhibit 10.10 Page 8
<PAGE>
Exhibit 10.10 Page 9
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Exhibit 10.11 Private Placement Memorandum
Private Placement Memorandum Copy __ ___
600,000 Units
[LOGO]
ROCKY MOUNTAIN INTERNET, INC.
THIS PRIVATE PLACEMENT MEMORANDUM RELATES TO THE SALE OF UP TO 600,000 UNITS
("UNIT") BY ROCKY MOUNTAIN INTERNET, INC., A DELAWARE CORPORATION ("RMI" OR THE
"COMPANY") AT A PRICE OF $4.00 PER UNIT. EACH UNIT CONSISTS OF TWO SHARES OF
COMMON STOCK, $.001 PAR VALUE PER SHARE ("COMMON STOCK" OR "COMMON SHARES"), AND
ONE WARRANT ("WARRANT"). THE $4.00 PER UNIT PURCHASE PRICE IS ALLOCATED $1.90
TO EACH SHARE OF COMMON STOCK AND $.20 TO THE WARRANT. EACH WARRANT ENTITLES
THE REGISTERED HOLDER THEREOF TO PURCHASE ONE SHARE OF COMMON STOCK AT AN
EXERCISE PRICE OF $3.00 PER SHARE. THE COMMON STOCK TRADES ON THE NASDAQ
SMALLCAP MARKET UNDER THE SYMBOL "RMII". SEE "DESCRIPTION OF SECURITIES".
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE, AND AN INVESTMENT IN THE
SHARES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS."
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THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT") OR APPLICABLE STATE SECURITIES LAWS, AND ARE BEING OFFERED
AND SOLD IN RELIANCE ON EXEMPTIONS FROM THOSE LAWS. THE SECURITIES HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE REGULATORY AUTHORITY NOR HAS THE COMMISSION OR ANY STATE REGULATORY
AUTHORITY PASSED UPON OR ENDORSED THE MERITS OF THE OFFERING OR THE ACCURACY OR
ADEQUACY OF THIS PRIVATE OFFERING MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL. THE SECURITIES MAY NOT BE TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE
SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED.
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Price Selling Proceeds
per Commissions to
Unit Company
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Per Unit $4.00 $0.40 $3.60
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Total $2,400,000 $240,000 (1) $2,160,000 (2)
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(1) Estimated total commissions to be paid to Neidiger/Tucker/Bruner, Inc.
(the "Placement Agent") based on 10% of the aggregate offering price.
The Company also has agreed to indemnify the Placement Agent against
certain civil liabilities, including liabilities under the Securities Act
of 1933.
(2) Before deducting expenses of the Offering payable by the Company estimated
to be approximately $240,000, assuming that the full offering is sold.
Proceeds will be available to and used by the Company even if less than the
total proceeds reflected above are sold. See "Use of Proceeds."
The date of this Private Placement Memorandum is June 13, 1997.
Exhibit 10.11 Page 1
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SUMMARY OF THE OFFERING
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Private Offering Memorandum and the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996, Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1997 and the Prospectus dated September 5, 1996, copies
of which have been provided with this document. Prospective investors should
consider carefully the information discussed under "Risk Factors."
THE COMPANY
The Company is a regional full-service Internet access provider offering a wide
range of Internet access services including dial-up accounts, dedicated
accounts, software solutions, and World Wide Web ("Web") services to businesses,
professionals and individuals in the State of Colorado. The Company devotes
particular attention to providing customers exemplary service at competitive
prices. (Please see the attached glossary for an explanation of technical terms
used in this Private Placement Memorandum). The Company has experienced rapid
growth, with more than 6,500 businesses and professionals and more than 6,000
individuals having subscribed to the Company's services since the Company
commenced providing Internet access in August 1993 and Web services in May 1995.
RMI anticipates continued rapid growth in the number of business, professional
and individual subscribers.
RMI believes that business and professional users of Internet services offer the
greatest opportunity for continued growth and the Company's strategy includes
marketing especially to these customers. It is the intention of RMI to
competitively leverage its local presence in each of its targeted markets and
provide on-site sales and support. RMI has targeted regional population centers
in the Rocky Mountain States that are less competitively saturated than the
major U.S. population centers. The Company currently anticipates that the
additional markets targeted by the Company will be similar to the Company's
existing markets in the State of Colorado insofar as these markets must have a
large enough population base to offer a return on the Company's investment in
these locations. The Company intends to offer its customers a comprehensive
sales and marketing effort which concentrates on the highest quality services, a
consultative approach to Internet use, applications, solutions and excellent
after sales support.
RMI's network infrastructure is comprised of a regional telecommunications
network supported by a backbone of leased, high-speed dedicated phone lines,
computer hardware and software, and local access points known as points of
presence ("POPs") in eleven Colorado cities providing Internet access
availability to more than 85% of the population in Colorado. The Company's
strategy includes constructing additional POPs in various cities located in the
Rocky Mountain West.
The Internet is a worldwide network of private and public computer networks that
link universities, government agencies, commercial entities, individuals, and
other users having disparate computer systems and networks by means of a common
communications standard. The Internet had its origins in 1969 as a project of
the Advanced Research Project Agency ("ARPA") of the U.S. Department of Defense.
The network established by ARPA was designed to provide efficient connections
between different types of computers separated by large geographic areas and to
function even if part of the network became inoperative. Use of the Internet
was initially restricted by the U.S. government to participants in
Exhibit 10.11 Page 2
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government or university research. Since the early 1990's when these
restrictions on commercial use were gradually lifted, commercialization of the
Internet has taken place at a rapid pace. Use of the Internet has grown rapidly
since its commercialization in the early 1990's. According to the
CommerceNet/Nielsen Internet Demographics Survey, 17% (thirty seven million) of
total persons aged 16 and above in the U.S. and Canada have access to the
Internet, and 11% (twenty-four million) have accessed the Internet in the past
three months. Using a computer equipped with a modem or dedicated phone line, an
RMI subscriber can access the Internet's vast and expanding communications,
information, entertainment, and computer resources, including its emerging
applications, all for an affordable monthly charge.
THE OFFERING
Securities Offered (1).......... 600,000 Units, each consisting of the two
shares of Common Stock and one Warrant. Each
Warrant entitles the holder to purchase one
share of Common Stock at a price of $3.00 per
share. (See "Description of Securities").
Capital Stock Outstanding (2)
Before the Offering ....... 4,625,846 shares of Common Stock and 250,000
shares of Series A Preferred Stock
After the Offering ........ 5,825,846 shares of Common Stock and 250,000
shares of Series A Preferred Stock
Use of Proceeds................. To fund the Company's trade payables, accrued
liabilities, sales & marketing expenses,
equipment purchases and to provide working
capital. (See "Use of Proceeds").
METHOD OF SUBSCRIPTION
An investment in Shares involves a high degree of risk and is suitable only for
persons of substantial financial means who can afford to lose their entire
investment and who have no need for liquidity in their investments.
Accordingly, Units will be sold only to Accredited Investors (as that term is
defined pursuant to regulations promulgated under the Securities Act of 1933, as
amended) who purchase the Units without any view to distribution or resale. See
"Terms of the Offering-Qualifications of Purchasers." Each prospective investor
desiring to purchase Units must execute and deliver to the Company a
Subscription Application together with payment in the amount of $4.00 per Unit
purchased. This offering will be sold through July 31, 1997 and may be extended
for a period of 45 days by mutual agreement by the Company and
Neidiger/Tucker/Bruner, Inc. The minimum purchase is 12,500 Units or $50,000,
subject to waiver by the Company in appropriate cases.
THE PLACEMENT AGENT
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Neidiger/Tucker/Bruner, Inc., 1675 Larimer Street, Plaza Level 3, Denver,
Colorado 80202, will act as placement agent (the "Placement Agent") in
connection with the Offering. See "Terms of the Offering."
RISK FACTORS
RISK FACTORS RELATED TO THE OFFERING
POSSIBLE VOLATILITY OF MARKET PRICES. The Company's Common Stock is currently
traded on the NASDAQ SmallCap Market. There can be no assurance that an active
trading market for the Common Stock will be sustained after this offering or
that the Common Stock will remain eligible to be included on NASDAQ following
completion of this offering. Consequently, purchasers in this offering may be
exposed to a substantial risk of lack of liquidity in their investment even
after restrictions on transfer of Common Stock imposed under Rule144 lapse. See
"Restrictions on Transfer of Units."
POSSIBLE VOLATILITY OF STOCK PRICES; PENNY STOCK RULES. The over-the-counter
markets for securities such as the Company's Common Stock and Warrants,
historically have experienced extreme price and volume fluctuations during
certain periods. These broad market fluctuations and other factors, such as new
product developments and trends in the Company's industry and the investment
markets generally, as well as economic conditions and quarterly variation in the
Company's results of operations, may adversely affect the market price of the
Company's Common Stock. Although the Common Stock is currently trading on the
NASDAQ SmallCap Market, there can be no assurance that it will remain eligible
to be included on NASDAQ. In the event that the Company's Common Stock is no
longer eligible for quotation on NASDAQ, the Common Stock could become subject
to rules adopted by the Securities and Exchange Commission ("SEC") regulating
broker-dealer practices in connection with transactions in "penny stocks." If
the Company's Common Stock became subject to the penny stock rules, many brokers
may be unwilling to engage in transactions in the Company's securities
SHARES AVAILABLE FOR ISSUANCE. The Company has 10,000,000 shares of Common
Stock and 1,000,000 shares of Preferred Stock authorized, of which 5,825,846
shares of Common Stock and 250,000 Shares of Preferred Stock will be outstanding
after the Offering. Accordingly, there will be 4,174,154 shares (of which
2,990,300 have been reserved for issuance upon exercise of warrants and options
issued by the Company and upon conversion of the Series A Preferred Stock) of
Common Stock that may be issued in the future at the discretion of the Company's
Board of Directors. There are currently 250,000 shares of Preferred Stock
outstanding. Additional Preferred Stock may be issued by the Board of Directors
in its discretion without shareholder approval, with such designations,
preferences, dividend rates, conversion and other features as the Board of
Directors may determine. The rights of the holders of Common Stock are subject
to and may be adversely affected by the terms of any additional classes of
Preferred Stock which the Company may issue in the future. The Company has
issued 363,900 incentive options to employees.
NEW AND UNCERTAIN MARKET. The market for Internet connectivity services and
related software products is in an early stage of growth. Because this market
is relatively new and because current and future competitors are likely to
introduce competing Internet connectivity and on-line services and products, it
is difficult to predict the rate at which the market will grow or at which new
or increased competition will result in market saturation. The novelty of the
market for Internet access services may also adversely affect the Company's
ability to retain new customers unfamiliar with the Internet who may be more
likely to discontinue the Company's services after an initial trial period. If
demand for Internet services fails to grow, grows more
Exhibit 10.11 Page 4
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slowly than anticipated, or becomes saturated with competitors, the Company's
business, operating results and financial condition will be adversely affected.
STATE LAW LIMITATIONS ON DIRECTOR LIABILITY FOR MONETARY DAMAGES. The Company's
Certificate of Incorporation substantially limits the liability of the Company's
Directors to its shareholders for breach of fiduciary or other duties to the
Company.
DELAWARE ANTI-TAKEOVER PROVISIONS. Delaware General Corporation Law provides
for substantial limitations on consummation of certain transactions by
interested shareholders for a period of three years after such shareholders
become shareholders, unless the Board of Directors approves the transaction, the
interested shareholder owns 85% of the issued and outstanding voting stock of
the corporation, or the transaction is approved by the Board of Directors and
affirmative vote of at least 66% of the outstanding voting stock of the
corporation not owned by the interested shareholder. See "Description of
Capital Stock - Certain Anti-takeover Effects of Provisions of Delaware law."
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS. This Memorandum contains
certain forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 (the "Act") and Section 21E of the Securities and
Exchange Act of 1934 (the "Exchange Act") and the Company intends that such
forward-looking statements be subject to the safe harbors for such statements
under such sections. The Company's forward-looking statements include the plans
and objectives of management for future operations, including plans and
objectives relating to its Internet connection services and future economic
performance of the Company. The forward-looking statements and associated risks
set forth in this Memorandum include or relate to: (i) ability of the Company
to attract and retain qualified technical personnel relating to its Internet
connection services, (ii) ability of the Company to market its services at
competitive prices, (iii) development of brand-name recognition and loyalty for
the Company's services, (iv) development of an effective sales staff and sales
network of independent sales representatives, (v) market acceptance of the
Company's services, (vi) success of the Company's market initiatives, (vii)
expansion of sales in the industries to which the Company provides its Internet
connection services, (viii) success of the Company in forecasting demand for its
Internet connection services, (ix) success of the Company in diversifying the
Company's market to provide services to large and small businesses,
professionals and individuals (x) achievement of forecast profit margins
dependent upon price and efficient provision of services, (xi) availability of
suitable licenses or other intellectual property access and protection for the
Company's Internet connection services and (xii) success of the Company in
achieving increases in net sales to a) reduce the cost of services sold and b)
decrease general, administrative and development costs as a percentage of net
sales.
The forward-looking statements herein are based on current expectations
that involve a number of risks and uncertainties. Such forward-looking
statements are based on assumptions that the Company will continue to design,
market and provide new services on a timely basis, that competitive conditions
in the Internet connection service market will not change adversely or
materially, that demand for the Company's Internet connection services will gain
strength, that the market will accept the Company's services, that the Company
will retain and add qualified sales, research and service personnel and
consultants, that the Company's forecasts will accurately anticipate market
demand, and there will be no adverse material change in the Company's operations
or business. The foregoing assumptions are
Exhibit 10.11 Page 5
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based on judgments with respect to, among other things, future economic,
competitive and market conditions, and future business decisions, all of
which are difficult or impossible to predict accurately and many of which are
beyond the Company's control. Accordingly, although the Company believes
that the assumptions underlying the forward-looking statements are reasonable,
any such assumption could prove to be inaccurate and therefore, there can be
no assurance that the results contemplated in forward-looking statements will
be realized. In addition, as disclosed elsewhere in the "Risk Factors"
section of this Memorandum, there are a number of other risks presented by
the Company's business and operations which could cause the Company's net
sales or net income, or growth in net sales or net income to vary markedly
from prior results or the results contemplated by the forward-looking
statements. Management decisions, including budgeting, are subjective in
many respects and periodic revisions must be made to reflect actual
conditions and business developments, the impact of which may cause the
Company to alter its marketing, capital investment and other expenditures,
which may adversely affect the Company's results of operations. In light of
significant uncertainties inherent in the forward-looking information
included in this Memorandum, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
Company's objectives or plans will be achieved.
RISK FACTORS RELATED TO THE COMPANY
LIMITED HISTORY OF OPERATIONS; OPERATING DEFICIT; CONTINUING LOSSES. The
Company's predecessor began offering its local electronic bulletin board
services in 1993. Internet access services were first introduced by the Company
in late 1993. Although the Company has experienced revenue growth on an annual
basis, it has incurred losses and experienced negative cash flow since the
Company began to offer its services. As of March 31, 1997, the Company's
current liabilities exceeded its current assets and the Company has incurred a
loss for the quarter ended March 31, 1997 of $803,611. The Company expects to
incur a loss for the year ending December 31, 1997. The Company does not expect
its cash flow to improve unless it can generate additional sales. There can be
no assurance that revenue growth will continue in the future or that the Company
will achieve profitability or positive cash flow from operations. The Company
expects to focus in the near term on building and increasing its subscriber base
which will require it to increase its expenses for marketing, network
infrastructure, the development of management information systems and service
software. As a result, the Company believes that it will incur losses in the
near term. In addition, the Company may continue to experience fluctuations in
operating results in the future caused by various factors, some of which are
outside of the Company's control, including general economic conditions,
specific economic conditions in the Internet access industry, user demand for
the Internet, capital expenditures and other costs relating to the expansion of
operations, the timing of customer subscriptions, the introduction of new
services by the Company or its competitors, the mix of services sold, and the
mix of channels through which those services are sold. The Company's working
capital deficit and accumulated deficit as of March 31, 1997 was $(803,611) and
$(3,418,316), respectively.
EXPANSION; CAPITAL REQUIREMENTS. The Company must continue to enhance and
expand its network in order to maintain its competitive position and to continue
to meet the increasing demands for service quality, availability and competitive
pricing. The Company anticipates that the net proceeds of the private
placement, together with revenues, will sustain the Company's operations for at
least 6 months from the closing of the private placement. As of March 31, 1997,
the Company's current liabilities exceeded its current assets and the Company
has incurred a loss for the year ended December 31, 1996 of $2,302,571 and the
three months ended March 31, 1997 of $889,637. The Company does not expect its
cash flow to improve unless it can generate additional sales. If sufficient
cash flow is not being generated when the Company has
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used the proceeds of the offering, the Company will be required to seek
additional funds through equity or debt financing. There can be no assurance
that such capital will be available on terms favorable to the Company, or at
all. The failure to raise any required additional capital would have a
material adverse effect on the Company's business, including a possible
reduction or cessation of operations. If the Company is successful in raising
the additional capital, the cost of the funds and the extent of attendant
dilution to present shareholders and purchasers in this offering, will
largely be determined by market conditions and the continued revenue growth
of the Company.
The Company's ability to continue operations beyond 6 months after the
closing of the offering depends upon its ability to generate positive net cash
flow from operations, which it has not done to date.
Competition. The Internet access services business is highly competitive and
there are no substantial barriers to entry. Currently, the Company competes
with a number of national Internet service providers such as NETCOM On-Line
Communication Services, Inc. ("NETCOM"), Performance Systems International, Inc.
("PSI"), Bolt Beranek & Newman Inc. ("BBN"), and UUNET Technologies Inc.
("UUNET"), as well as regional competitors such as Colorado Supernet, Inc. and
Internet Express, Inc. In addition, a number of large organizations including
AT&T, MCI, Sprint, as well as the regional telephone companies, are offering or
have announced plans to offer Internet or on-line services. The Company also
competes with smaller regional and local providers.
The Company also faces significant competition from the on-line services
industry. Major on-line competitors include America On-line, Inc., Compuserve
Inc., Delphi Internet Services, Prodigy Services Company and Microsoft Corp.
("Microsoft"). The Company believes that all of the major on-line services
companies will eventually compete fully in the Internet access market.
In addition, the Company believes that new competitors, including large computer
hardware and software companies, media companies, cable television operators,
and telecommunications companies such as the regional telephone companies, will
enter the Internet connectivity market, resulting in even greater competition
than currently exists. The ability of some of these competitors to bundle
Internet services with other services and products could place the Company at a
competitive disadvantage. In August 1995, Microsoft announced its plans to
create the Microsoft Network, an on-line service. Recently, Microsoft has
introduced software called Microsoft Internet Explorer which competes with
software designed to browse the Internet's World Wide Web offered by companies
such as Netscape Communications Corporation and NETCOM. Microsoft has recently
entered into strategic relationships with America On-line, AT&T, and several
regional telephone companies. Also in February 1996, AT&T announced its entry
into the Internet access business by offering customers 5 hours per month of
free service or unlimited service for $19.95 per month.
Most of these current and prospective competitors have substantially greater
market presence, engineering, marketing capabilities, financial, technological
and personnel resources greater than the Company's. As a result, competitors
may be able to expand and develop their businesses more rapidly and adapt more
quickly to emerging technologies and changes in consumer demand.
As competition increases, price competition may intensify which could result in
downward pressure on the average selling price of the Company's services.
Increased competition could also adversely affect the Company's ability to
attract new subscribers or to retain existing
Exhibit 10.11 Page 7
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subscribers. All of the foregoing could adversely affect the Company's
financial condition and results of operations. There can be no assurance
that the Company will have the financial resources, technical abilities, or
marketing ability to continue to compete successfully.
PRICING PRESSURES. The Company reduced the prices it charges its customers
during 1996 as a result of competitive pricing pressures in the market for
Internet services. The Company expects that continued price pressures may cause
the Company to reduce prices further in order to remain competitive, and the
Company expects that such further price reductions would adversely effect the
Company's results of operations and its ability to attain profitability. There
is no assurance that the Company can attain profitability while pricing its
services competitively. The Company's cost structure may require higher prices
to achieve profitability than the cost structure of its competitors.
MANAGEMENT OF GROWTH. The Company's rapid growth has placed, and in the future
may place, a significant strain on the Company's administrative, operational and
financial resources, and increased demands on its systems and controls. The
Company has considered plans to expand its network to at least two additional
states over the next 24 months. There can be no assurance that the Company will
be able to add service in new cities at the rate of or according to the schedule
presently planned by the Company. The Company anticipates that its continued
growth will require it to recruit and hire a substantial number of new
managerial, technical, sales and marketing personnel. The inability to continue
to upgrade the networking systems or the operating and financial control
systems, the inability to recruit and hire necessary personnel, or the emergence
of unexpected expansion difficulties could adversely affect the Company's
business, results of operations and financial condition.
SECURITY RISKS. Despite the implementation of network security measures by the
Company, its infrastructure remains vulnerable to computer viruses, sabotage,
break-ins, and similar disruptive problems caused by its subscribers or other
Internet users. Computer viruses, break-ins, or other problems caused by third
parties could lead to interruptions, delays, or a cessation in service to the
Company's subscribers. Furthermore, inappropriate use of the Internet by third
parties could potentially jeopardize the security of confidential information
stored in the computer systems of the Company's customers, which may deter
potential subscribers and may inhibit the growth of the Internet service
industry in general.
DEPENDENCE ON TELECOMMUNICATIONS ACCESS. The Company relies on other companies
to provide data communications capacity via leased telecommunications lines. If
one or more of these companies is unable or unwilling to provide or expand its
current levels of service to the Company in the future, the Company's operations
could be materially and adversely affected. Although leased telecommunications
lines are available from several alternative suppliers, including AT&T, MCI,
Sprint and WilTel, there can be no assurance that the Company could obtain
substitute services from other providers at reasonable or comparable prices or
in a timely fashion. In addition, the Company is dependent on local telephone
companies to provide local dial-up and dedicated access lines for access to each
of the Company's POPs. The Company is presently dependent on a regional Bell
operating company, which is a competitor of the Company, to provide timely
installation of new circuits and to maintain existing circuits. The Company has
experienced delays in the installation of circuits and inconsistencies in
maintenance service from this supplier, which have adversely affected the rate
of growth of the Company. The Company does not foresee any significant near
term improvements in services provided by this regional Bell operating company.
In addition, certain of the Company's telecommunications access providers either
now or in the future may compete with the Company. See "Competition" and "Risk
Factors - Competition."
Exhibit 10.11 Page 8
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RISK OF SYSTEM FAILURE. The success of the Company, among other things, is
dependent upon its ability to deliver uninterrupted access to the Internet. Any
system failure that causes excessive interruptions in the Company's operations
could have a material adverse effect on the Company. As the Company expands its
network and data traffic grows, there will be increased stress placed upon
network hardware and traffic management systems. Any of a number of potential
hardware failures as well as failure caused by fire, floods or other natural
causes, could result in significant interruptions of the Company's services.
DEPENDENCE ON SINGLE SOURCE SUPPLIERS. The Company is dependent upon U S West,
a regional Bell operating company and a competitor of the Company, to provide
local dial-up and dedicated access lines for access to each of the Company's
POPs. The Company does not have a long-term contract with this supplier, and if
the supplier were to change its pricing structures, the Company could be
adversely affected. Moreover, were the Company to experience difficulty in
maintaining this source of supply, there can be no assurance that an alternative
source of supply would be available or, if available, that such alternative
supply would be at prices that would permit the Company to profitability market
its` services.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant
degree upon the continued contributions of its senior operating management,
particularly Roy J. Dimoff, its President & CEO. The loss of Mr. Dimoff's
services could have a detrimental effect on the Company. Key employees'
employment agreements do not significantly limit their ability to compete with
the Company following termination. ("See Management"). The Company has
obtained a $1,000,000 key-man life insurance policy on Mr. Dimoff. The
Company's success will also depend on its ability to attract and retain other
qualified management, marketing, technical and sales executives and personnel.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results
have varied in the past and may in the future vary significantly, depending upon
factors such as the timing and installation of significant orders, which in the
past have been, and will in the future be, delayed from time to time by delays
in the installation of lines and equipment by the Company's telecommunications
subcontractors. Additional factors contributing to variability of operating
results include the pricing and mix of services and products sold by the
Company, terminations of service, new product introductions by the Company and
its competitors, market acceptance of new and enhanced versions of the Company's
products and services, changes in pricing policies by its competitors, the
Company's ability to obtain sufficient supplies of sole or limited source
components, and the timing of the expansion of the Company's network
infrastructure. In response to competitive pressures, the Company may take
certain pricing or marketing actions that could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company's network related expense levels are relatively fixed in the short term.
As a result, variations in the timing and amounts of revenues could have a
material adverse effect on the Company's operating results.
MANAGEMENT DISCRETION IN USE OF PROCEEDS. Management will have substantial
discretion on the use of proceeds of this offering and investors in the Shares
will have no opportunity to be informed about or vote upon management
determinations relating to use of proceeds. See "Use of Proceeds."
INDUSTRY RISK FACTORS
PRODUCT DEVELOPMENT; TECHNOLOGY CHANGE. The Company's success depends upon its
ability to develop new services that meet changing customer requirements. The
market for the Company's
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services is characterized by rapidly changing technology, evolving industry
standards, emerging competition, and frequent new service introductions.
There can be no assurance that the Company can successfully identify new
opportunities and develop and bring new services to market in a timely
manner, or that services or technologies developed by others will not render
the Company's services noncompetitive or obsolete. The Company also faces
the risk that fundamental changes may occur in the delivery of Internet
access services. Currently, Internet services are accessed primarily by
computers and are delivered by telephone lines. If the Internet becomes
accessible by screen-based telephones, television, or other consumer
electronic devices, or becomes deliverable through other means such as
coaxial cable or wireless transmission, the Company will have to develop new
technology or modify its existing technology to accommodate these
developments. Required technological advances by the Company as the industry
evolves could include compression, full-motion video, and integration of
video, voice, data and graphics. The Company's pursuit of these technological
advances, whether directly through internal development or by third party
license, may require substantial time and expense, and there can be no
assurance that the Company will succeed in adapting its Internet service
business to alternate access devices and conduits.
GOVERNMENT REGULATION; LIABILITY FOR CONTENT. The Company is not currently
subject to direct regulation by the Federal Communications Commission or any
other agency, other than regulations applicable to businesses generally.
Changes in the regulatory environment relating to the Internet connectivity
industry, including regulatory changes directly or indirectly, affect
telecommunication costs or increase the likelihood or scope of competition from
regional telephone companies or others, could have an adverse effect on the
Company's business. The Company cannot predict the impact, if any, that future
regulation or regulatory changes may have on its business. Recent legislation
prohibiting the publication on the Internet of certain content and materials
could result in significant potential liability to Internet access providers
including the Company. The Company is aware of at least one civil suit brought
against a provider of Internet services which includes claims based upon
distribution by the service provider of content that did not originate with the
provider. There is currently no practical means for providers of Internet
services, including the Company, to monitor content on the Internet even though
access providers such as the Company may be held liable for content distributed
through access provided by it. The Company does not have insurance which would
cover any such claims and does not anticipate such insurance will be available
and affordable to the Company in the future.
Exhibit 10.11 Page 10
<PAGE>
THE COMPANY
The Company is a Delaware corporation with its chief executive office located in
Denver, Colorado, and an operating facility located in Colorado Springs,
Colorado. The Company employs approximately 78 persons. The Company was
incorporated in October 1995, and is the successor to Rocky Mountain Internet, a
Colorado corporation ("RMIC") which was incorporated in 1993. In connection
with the Company's formation, all the assets and liabilities of RMIC were
transferred to the Company (the "Reincorporation Transaction") in November 1995.
The Company had no operations prior to the consummation of the Reincorporation
Transaction, which was effected to obtain the benefits of certain aspects of
Delaware corporate law (see "Description of Capital Stock") and to cure certain
ambiguities in RMIC's constituent documents. RMIC currently has no assets and
no operations. The Company has one wholly owned subsidiary, Rocky Mountain
Internet Subsidiary (Colorado), Inc., which holds certain tangible equipment
used by the Company in its operations.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the offered Units at a price of
$4.00 per Unit are estimated to be $2,160,000, assuming that the total 600,000
Units are sold, net of underwriting discounts and commissions and estimated
offering expenses. The Company currently intends to use the net proceeds of the
offering approximately as follows:
<TABLE>
<S> <C> <C>
Trade Payables and Accrued Liabilities $1,300,000 60.19%
Payment of accounts payable owed to various
suppliers of the Company.
Sales and Marketing $160,000 07.41%
Continuation of present sales and marketing
programs including present and new marketing programs
Equipment Purchases $150,000 06.94%
Office and network equipment purchases including
personal computers, office equipment and network
servers and various network equipment
Working Capital $550,000 25.46%
May be used to fund operating expenses that are
expected to exceed cash provided from operations until
the Company reaches positive cash flow from operations
</TABLE>
The Company has not determined the exact amounts it plans to allocate to each of
the foregoing uses or the timing of such uses. Management believes that the
proceeds of the offering will enhance the Company's competitiveness through
increased financial strength and the ability to grow its business, both as
enumerated above and in respect of increased ability to take advantage of future
opportunities as they arise, including strategic alliances or the acquisition of
additional businesses or services on a favorable basis. Although the Company is
not currently a party to any agreement regarding any strategic relationship, it
intends to be receptive to opportunities to achieve growth and competitive
advantage as they may arise.
If the Company does not sell the full 600,000 Units, net proceeds of the
offering will be applied first to accounts payable, accrued liabilities and
working capital. If the proceeds of this offering
Exhibit 10.11 Page 11
<PAGE>
are not sufficient to discharge its accounts payable and accrued liabilities,
or the Company does not achieve its expected growth in revenue over the next
several months, it will have to reduce operating expenses, which could have a
material adverse effect on the financial condition, results of operations and
business prospects of the Company.
Management of the Company will have substantial discretion in the use of the
offering proceeds, and shareholders generally will have no opportunity to vote
upon management decisions regarding use of proceeds prior to their utilization.
See "Risk Factors." The Company anticipates that the net proceeds of the
offering, together with revenues from operating activities, will sustain the
Company's operations for at least 6 months from the closing of the offering.
Pending application of the net proceeds as described above, the Company intends
to invest the proceeds of the offering in short-term investment grade
obligations or short-term insured certificates of deposit.
Management of the Company will have substantial discretion in the use of the
offering proceeds, and shareholder general will have no opportunity to vote upon
management decisions regarding proceeds of the offering, together with revenues
from operating activities, will sustain the Company's operations for at least 6
months from the closing of the offering. Pending application of the net
proceeds as described above, the Company intends to invest the proceeds of the
offering in short-term investment grade obligations or short-term insured
certificates of deposit.
If management determines that the use of proceeds of this offering described
above is impractical or inadvisable, the Company may apply the offering proceeds
in such a manner as management deems appropriate under then existing
circumstances, which may vary significantly based on a number of factors, the
effect of which is difficult to predict. Such factors include, but are not
limited to, future revenues and the amount of cash generated by the Company's
operations, changes in the competitive environment, and unanticipated
opportunities to pursue business opportunities or to enter into strategic
relationships with third parties.
DIVIDEND POLICY
The Company has not declared dividends on the Common Stock in the past and none
are expected to be declared in the foreseeable future. Dividends are expected
to be paid on the Series A Preferred Stock to the extent that the Company is not
prohibited to do so. Dividends accrue on the Series A Preferred Stock at the
rate of 10% per annum, payable quarterly ($12,500 per calendar quarter), and are
added to the liquidation value thereof if not paid. Except as described above,
the Company intends to retain any earnings for use in the Company's business and
therefore does not intend to declare dividends on any of its capital stock
except the Series A Preferred Stock. See "Description of Securities."
Exhibit 10.11 Page 12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March 31,
1997 and as adjusted to reflect the receipt of the net proceeds from the sale of
600,000 Units at the Offering price of $4.00 per Unit:
---------------------------
Pro Forma
3/31/97 As Adjusted(1)
- --------------------------------------------------------------------------------
Long-term Debt:
- --------------------------------------------------------------------------------
Capital lease obligations and other 1,077,329 1,077,329
- --------------------------------------------------------------------------------
Total long-term debt 1,077,329 1,077,329
- --------------------------------------------------------------------------------
Stockholders' (deficit) equity: (2)
- --------------------------------------------------------------------------------
Preferred Stock, $.001 par value; 1,000,000
shares authorized; no shares issued and
outstanding; 250,000 as adjusted 250 250
- --------------------------------------------------------------------------------
Common Stock; $.001 par value; 10,000,000 shares
authorized; 4,648,565 shares issued and
outstanding; 5,858,000 as adjusted for Pro Forma 4,658 5,858
- --------------------------------------------------------------------------------
Additional paid in capital 5,121,990 7,280,790
- --------------------------------------------------------------------------------
Retained earnings (Accumulated Deficit) (3,418,316) (3,418,316)
- --------------------------------------------------------------------------------
Total stockholder's (deficit) equity 1,708,582 3,868,582
- --------------------------------------------------------------------------------
(1) Pro forma figures are adjusted to give effect to the issuance of the Units
and the application of the proceeds of this offering, assuming that all
units hereby offered are purchased.
(2) Stockholders' equity in this chart gives no effect to any conversion of the
Preferred Stock or any exercise of outstanding options.
(3) There are 1,365,000 warrants for the purchase of one common share per
warrant outstanding at an exercise price of $4.375 per share. If this
Private Placement is totally sold, then the warrant exercise price will be
reduced to $3.908 per share and the total number of shares will be
increased to 1,528,233.
Exhibit 10.11 Page 13
<PAGE>
EMPLOYEES
As of May 31, 1997, RMI employed 78 persons, including 18 in sales and
marketing, 9 in RMI Web services, 28 in technical operations, and 23 in general
and administrative functions. None of RMI's employees is represented by a labor
union and RMI considers its employee relations to be good.
MANAGEMENT
OFFICERS AND DIRECTORS
The officers, directors and senior management of the Company, and their ages as
of March 31, 1997 are as follows:
NAME AGE POSITION
---- --- --------
Roy J. Dimoff 38 President, Chief Executive Officer, Director
David Evans 55 Executive Vice President, Chief Financial
Officer
Nancy P. Phillips 37 Senior Vice President - Operations
Kevin Loud 44 Vice President - Business Development,
Secretary
Brian Dimoff 39 Vice President - Customer Support Operations
Kirk Roberts 45 Vice President - Finance and MIS
Richard Dingess 45 Vice President - Network Operations
Mike Mara 36 Vice President - Commercial Sales
Gerald Van Eeckhout 56 Chairman of the Board
Chris Phillips 31 Director
The management of the Company serve at the discretion of the Board of Directors.
The current authorized number of directors of the Company is three. Each
director serves for a term of one year and is elected at the annual meeting of
stockholders held each year on a date determined by the Board of Directors. A
date for the annual meeting for the year ended December 31, 1996 has yet to be
determined.
Mr. Dimoff has served as President and Chief Executive Officer since July 1995
and a Director of the Company. Prior to joining Rocky Mountain Internet, Inc.,
Mr. Dimoff was a Partner and Founder of RJ Alexander & Associates, a management
consulting firm from 1994 to 1995. From 1993 to 1994, Mr. Dimoff was Executive
Vice President of ITC Worldwide Telecommunications Company, LP, a provider of
broadcast fax, fax on demand, audio conferencing and multi-point video services.
From 1988 to 1993, Mr. Dimoff was Vice President and General Manager of the
Services Division of ConferTech International, Inc., and President of the
Canadian subsidiary. ConferTech is a leading provider of digital audio and
video conference bridging equipment and services. Mr. Dimoff was President and
Founder of Teleconferencing Systems Canada, Inc. from 1985 to 1988, which he
later sold to ConferTech International, Inc. He has an Honors Bachelor of
Business Administration degree from Wilfrid Laurier University, Waterloo,
Ontario, Canada.
Mr. Evans joined the Company on June 1, 1997 as Executive Vice President and
Chief Financial Officer. Prior to RMI, he served as President of Evanwood
Corporation, a corporate financial consulting firm with both domestic and
international clients. Prior to Evanwood Corporation,
Exhibit 10.11 Page 14
<PAGE>
Mr. Evans spent 26 years at Deere and Company where he last served as Director
of Finance and was reponsible for funding John Deere's operations worldwide.
Mr. Evans served on the Board of Directors of Data Transmission Network
Corporation from 1986 to 1995. He currently serves on the Board of Mutual
Selection Fund, Inc. and John Deere Receivables, Inc. Mr. Evans has a
Bachelors of Arts degree in Economics from Iowa State University and an MBA
degree from the Wharton Graduate Division of the University of Pennsylvania.
Ms. Phillips is currently Senior Vice President - Operations and was Vice
President - Operations since May, 1996. Prior to joining Rocky Mountain
Internet, Inc., Ms. Phillips as the founder and owner of Phillips Taylor
Enterprises, L.L.C., a management consulting firm. From 1993 to 1994, Ms.
Phillips was Senior Vice President of ITC Worldwide Telecommunications Company,
LP, a provider of broadcast fax, fax on demand, audio conferencing and multi-
point video services. From 1988 to 1993, Ms. Phillips held positions as
Director of Corporate Marketing and Vice President Operations of ConferTech
International, Inc. ConferTech is a provider of digital audio and video
conference bridging equipment and services. From 1986 to 1988, Ms. Phillips as
Director of Marketing and Sales for Teleconferencing Systems Canada, Inc. Ms.
Phillips has an Honors Bachelor of Economics degree from Queens University,
Kingston, Ontario, Canada. Ms. Phillips is not related to Christopher K.
Phillips.
Mr. Loud joined the Company in July, 1995 and currently serves as Vice President
of Business Development and Corporate Secretary. Before that, he served as Vice
President of Marketing for SP Telecom, a national long distance company from
1994 to 1995. In 1992 he formed Loud and Associates. Here, he consulted with
regional and national communication organizations on market development and
operation efficiencies until 1994. While operating Loud & Associates, Mr. Loud
undertook a year-long project for ACI, during which he was treated as a
statutory employee. In 1984, he helped form a long distance company, Houston
Network, Inc., and remained with it through acquisition by Wiltel, Inc. in 1989
and held positions ranging from Director of Finance, Vice President of
Operations and Carrier Sales, Vice President Sales, and President. The primary
business of the organization throughout this time was switched long distance
communication services. Mr. Loud left the organization in 1992 to form Loud and
Associates. He holds a Masters of Business Administration from William and
Mary, and a Bachelors of Arts in Economics from UCLA.
Mr. Brian Dimoff is Vice President - Customer Support Operations and joined the
Company in December, 1996. Before joining RMI, Mr. Dimoff had formed Inventory
Accuracy Solutions, Inc. (IAS) in January, 1995 as a management consulting firm
and completed contracts with MFP Technology Services Inc. and Digital Equipment
Corporation until November, 1996. From 1990 to 1995, Mr. Dimoff was the
Customer Satisfaction Manager for Digital Equipment of Canada, where he was
responsible for customer relations and in process quality for plant production
of personal computers and VAX technology systems. From 1976 to 1990, he held
various staff level positions for Digital Equipment of Canada in the areas of
Inventory Management and Distribution. Mr. Dimoff has a Professional Manager
designation from the Canadian Institute of Management. Mr. Dimoff is the
brother of Roy J. Dimoff.
Mr. Roberts served as Chief Financial Officer and Controller of the Company from
January, 1995 until June 1, 1997, where he became Vice President of Finance and
MIS. He was an accountant employed by Potter, Littlewood, & Petty, PC , an
accounting firm in Houston, Texas from 1991 to 1994. From 1989 to 1990, he
worked for a national computer retailer as National Product Manager - Accounting
Solutions. He has a Bachelor of Business Administration degree from the
University of Houston and is a certified public accountant.
Exhibit 10.11 Page 15
<PAGE>
Mr. Dingess has served as Vice President of Network Operations since April,
1997. From 1995 to 1997, he served as the Company's Director of Network
Operations. From 1994 to 1995, he was Director of Technical Services for
Trident Computer Services, a regional network consulting company. From 1989 to
1994 he worked as a network manager at Fort Carson, Colorado. From 1985 to
1989, he was team leader for software development for NATO's southern region.
Mr. Dingess attended Ohio State University and the University of La Verne.
Mr. Mara has served as Vice President of Commercial Sales since April, 1997.
From 1995 to 1997, Mr. Mara served as the Company's Director of Sales. From
1992 to 1995, he was Regional Vice President of Sales for ITC, A Worldwide
Telecommunications Company, Inc., a provider of audio and video teleconferencing
and fax services. From 1984 to 1992, Mr. Mara was employed in the retail stock
brokerage industry by RAF Financial Corporation, Cohig and Associates and
Merrill Lynch. Mr. Mara attended the University of San Diego and the University
of Nebraska.
Mr. Van Eeckhout is the current Chairman of the Board of the Company. He is
also Chairman of the Board and Chief Executive Officer of ACT Teleconferencing
since its formation in 1989. From 1982 to 1989, Mr. Van Eeckhout was President,
Chief Executive Officer, and a director of ConferTech International, Inc., a
teleconferencing services and manufacturing company. He received a B.S. degree
from the University of North Dakota in 1962, and completed the Stanford
Executive Program in 1976. He has also been a national director of the American
Electronic Association and president of the University of North Dakota
Foundation.
Mr. Phillips is a Director of the Company and was Chief Technical Officer of the
Company through May, 1997. From 1993 to 1995 he was the Company's Network
Operations Manager. From 1991 to 1993, Mr. Phillips was a Terminal Area
Security Officer in the United States Army. He secured computer terminals
linked to classified data and performed technical installation duties. From
1990 to 1991, Mr. Phillips worked as an Advanced Consumer Electronics Consultant
for Circuit City. Prior to 1990, Mr. Phillips was a Faculty Computing Project
Programmer for Brigham Young University. He has a Bachelor of Arts degree from
Brigham Young University.
EMPLOYMENT AGREEMENTS
The Company currently has employment agreements with, Messrs. Dimoff, Loud and
Roberts. The employment agreements terminate in December, 1999. Employment
agreements are terminable with cause. The Company may also terminate the
agreements without cause subject to the obligation to pay the terminated
employee a severance payment equal to from five to eight months salary based on
length of service with key employees do not significantly restrict such
employees' ability to compete with the Company following any termination.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation and Bylaws provide that the Company
shall indemnify all directors and officers of the Company to the fullest extent
now or hereafter permitted by the Delaware General Corporation Law. Under such
provisions any director or officer, who in his capacity as such, is made or
threatened to be made, a party an any suit or proceeding, shall be indemnified
if such director or officer acted in good faith an in a manner he reasonable e
believed to be in or not opposed to the best interest of the Company and, with
respect to any criminal proceeding, had no reasonable cause to believe his
conduct was unlawful.
Exhibit 10.11 Page 16
<PAGE>
In addition, the Company's Certificate of Incorporation provides that to the
fullest extent now or hereafter permitted by Delaware law, the Company's
directors will not be liable for monetary damages for breach of the director's
fiduciary duty of care to the Company and its stockholders. This provision in
the Certificate of Incorporation does no eliminate the directors' fiduciary duty
of care, and in appropriate circumstances equitable remedies such as an
injunction or other forms of non-monetary relief for breach of the director's
duty of loyalty to the Company and its stockholders, for acts or omissions under
Section 174 of the Delaware General Corporation Law (relating to the unlawful
payment of dividends and purchase or redemption of the Company's stock), or for
any transaction from which the director derived an improper personal benefit.
This provision also does not affect a director's responsibilities under any
other laws, such as the federal securities laws or state or federal
environmental laws.
There is no pending litigation or proceeding involving a director, officer,
employee or other agent of the Company as to which indemnification is being
sought. Except for the matter described under "litigation," the Company is not
aware of any other threatened litigation that may result in claims for
indemnification by any director, officer, employee or other agent. Insofar as
indemnification for liabilities arising under the Act may be permitted to
directors, officers or persons controlling the Company pursuant to such
indemnification provisions, the Company has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.
LITIGATION
On September 6, 1996, Robert Lewis and Storefronts in Cyberspace, L.L.C. filed a
complaint in Denver District Court naming the Company and the Colorado Rockies
Baseball Club as defendants. Claims against the Company consist of a breach of
contract claim in which the amount sought by the plaintiff is $25,000, and a
third party claim in respect of unspecified damages for trademark infringement
alleged by the Colorado Rockies Baseball Club against Mr. Lewis. In June, 1997,
a former employee threatened to commence litigation based on claims of
retaliation and sexual harassment. Management believes the foregoing actions
are without merit and intends to vigorously defend them.
Exhibit 10.11 Page 17
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 10,000,000 shares of
Common Stock, $.001 par value, and 1,000,000 shares of Preferred Stock, $.001
par value.
The following summary of certain provisions of the Common Stock and Warrants
included in the Units Preferred Stock does not purport to be complete and is
subject to, and qualified in its entirety by, the provisions of the Company's
Certificate of Incorporation, the Warrant Agreement and the Registration Rights
Agreement.. Investors should also review the description of the Company's
outstanding securities in its Prospectus dated September 5, 1996.
PREFERRED STOCK
The following is a summary of the rights and preferences of the Series A
Preferred Stock.
CONVERSION RIGHTS. Shares of Series A Preferred Stock may be converted into
shares of Common Stock at the option of the holder at any time after May 15,
1997. The rate of conversion is equal to the quotient of the then current
liquidation value and the then current conversion price, which is currently
$2.00 per share, subject to certain antidilution adjustments in respect of stock
dividends, stock splits, sales of Common Stock at prices below the conversion
price of the Series A Preferred Stock, and other corporate events such as
mergers and assets sales. The issuance of the Units will result in an
antidilution adjustment to the conversion rate of the Series A Preferred Stock.
LIQUIDATION PREFERENCE. Shares of Series A Preferred Stock have a liquidation
preference equal to $2.00 per share, plus any accrued and unpaid dividends. In
the event of any liquidation, dissolution, or winding up of the Company, the
Shares of Series A Convertible Preferred Stock will have first preference over
the Company's Common Stock in with respect to distributions to shareholders in
the Company in an amount equal to the aggregate liquidation value of the Series
A Preferred Stock.
DIVIDENDS. Shares of Series A Preferred Stock accrue dividends at the rate of
10% of the liquidation value per annum, payable quarterly to the extent not
prohibited by applicable law or the terms of any debt instrument by which the
Company may be bound. If the Company is unable to pay dividends as they accrue,
such dividends will be added to the liquidation value of the Series A Preferred
Stock and will increase the number of shares of Common Stock into which the
Series A Preferred Stock is convertible.
VOTING RIGHTS. The shares of Series A Preferred Stock do not have voting rights
except for certain rights required by law. As a class, the holders of the
Shares will have the right to vote with respect to any increase or decrease in
the number of shares of the class, any increase or decrease in the par value of
the Shares , or any proposed alteration or change on the powers, preferences, or
special rights of the class if such would affect the class adversely.
Pursuant to the Company's Amended and Restated Certificate of Incorporation, the
Board of Directors has the authority, without further action by the
stockholders, to issue up to 750,000 additional shares of preferred stock in one
or more series and to fix the designations, powers, preferences, privileges, and
relative participating, option or special rights and the qualifications,
limitations or restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences, any or
all of which may be greater than the
Exhibit 10.11 Page 18
<PAGE>
rights of the Series A Preferred Stock and the Common Stock. The Board of
Directors, without stockholder approval, can issue preferred stock with
voting, conversion or other rights that could adversely affect the voting
power and other rights of the holders of the Shares and the Common Stock.
Preferred Stock could thus be issued quickly with terms calculated to delay or
prevent a change in control of the Company or make removal of management more
difficult. At present, the Company has no plans to issue any of the Preferred
Stock other than the Series A Preferred Stock.
COMMON STOCK
As of March 31,1997, there were 4,648,565 shares of Common Stock outstanding.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Holders of Common
Stock may not cumulate votes in elections of Directors. Subject to preferences
that may be applicable to the Series A Preferred Stock, and to any other
outstanding shares of preferred stock, the holders of Common Stock are entitled
to receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available for the payment of dividends. See
"Dividend Policy." In the event of a liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities and liquidation preferences of any
outstanding shares of Preferred Stock into any other securities. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and non-assessable. There are
no preemptive, subscription, conversion or redemption right applicable to the
Common Stock.
CERTAIN ANTI-TAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW
The Company is subject to Section 203 of the Delaware General Corporation Law
("Section 203") which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the Board of
Directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder corporation becoming an interested
stockholder; (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition involving the interested stockholder
of 10% or more of the assets of the corporation; (iii) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation which has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, section 203 defines an
Exhibit 10.11 Page 19
<PAGE>
interested stockholder as any entity or person beneficially owing 15% or more
of the outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
WARRANTS
Each Warrant represents the right of the registered holder to purchase one share
of Common Stock at an exercise price of $3.00 per share subject to adjustment
(the "Purchase Price"), beginning at the close of this offering ending three
years from the date of closing, (the "Expiration Date"). The Warrant will be
entitled to the benefit of adjustments in the Purchase Price and in the number
of shares of Common Stock or other securities deliverable upon exercise thereof
in the event of a stock dividend, stock split, reclassification, reorganization,
consolidation or merger. In addition the Company has the right to reduce the
Purchase Price for a period of not less than 30 days upon not less than 30 days'
prior written notice to holders of the Warrants.
Each Warrant expires on the Expiration Date if not previously exercised. The
Company may at any time extend the Expiration Date of all then outstanding
Warrants for such increased period of time as it may determine.
The Warrants may be exercised upon surrender of the Warrant certificate on or
prior to the Expiration Date at the offices of the Company, with the form of
"Election to Purchase" on the reverse of the Warrant certificate completed and
executed as indicated, accompanied by payment of the full exercise price (by
certified check payable to the order of the Company) for the number of Warrants
being exercised.
No holder, as such, of any Warrant shall be entitled to vote or receive
dividends or be deemed the holder of Common Stock for any purpose whatsoever
until such Warrant has been duly exercised and the Purchase Price has been paid.
Exercise of the Warrants may only be effected pursuant to an applicable
exception from the registered requirements of the Securities Act of 1933, as
amended, and applicable state law, and Warrant holders who wish to exercise will
therefore be required to re-affirm warranties made by them in connection with
subscribing for the Units..
ANTIDILUTION ADJUSTMENT TO EXISTING WARRANTS
Issuance of the Units will result in an antidilution adjustment to the 1,365,000
Warrants issued in the Company's initial public offering in September, 1996.
Such adjustments will decrease the $4.375 exercise price of such warrants and
increase the number of shares of Common Stock issuable on exercise of such
Warrants.
REGISTRATION RIGHTS
The Company has agreed with the Placement Agent that it will, on or before
December 31, 1997within 180 days after completion of the offering, use
commercially reasonable efforts to file a registration statement with the
Securities and Exchange Commission registering resales of the Common Stock
included in the Units and the Common Stock issuable upon exercise of the
Warrants. The Company's obligation to effect such registration is subject to
certain limitations set forth in the Registration Rights Agreement., subject to
certain limitations and exceptions
Exhibit 10.11 Page 20
<PAGE>
specified in the Registration Rights Agreement. Perspective investors should
review the Registration Rights Agreement prior to making an investment.
TRANSFER AND WARRANT AGENT
The transfer agent and registrar for the Units and the Common Stock and Warrant
Agent for the Warrants is American Securities Transfer, Inc., 1825 Lawrence
Street, Suite 444, Denver, Colorado 80202-1817.
Exhibit 10.11 Page 21
<PAGE>
TERMS OF THE OFFERING
GENERAL
Subject to the terms and conditions set forth in this Private Offering
Memorandum, there are being offered a maximum of 600,000 Units consisting of
two shares of Common Stock, $.001 par value per share, and one redeemable
Warrant. Each Warrant entitles the registered holder thereof to purchase one
share of Common Stock at an exercise price of $3.00 per share. The Units are
being offered at a price of $4.00 per Unit of which a $1.90 has been
allocated to each Common Share and $.20 has been allocated to the Warrant.
The minimum investment is 12,500 Units or $50,000, subject to waiver by the
Company in appropriate cases.
The Units are being offered on an agency and "best efforts" basis through
Neidiger/Tucker/Bruner, Inc. (the "Placement Agent"). As compensation for
the Placement Agent's services, the Company will pay sales commissions to the
Placement Agent equal to 10% of the sales price of the Units sold. The
Placement Agent will have the right to pay or cause to be paid any portion of
the sales commissions to registered broker-dealers that are members of the
National Association of Securities Dealers, Inc. ("NASD") that the Placement
Agent selects to participate in this Offering.
Subject to certain conditions, the Company will indemnify the Placement Agent
and any other participating broker-dealers against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended (the "1933
Act"). The SEC believes indemnification for liabilities arising under the
1933 Act is contrary to public policy and therefore unenforceable.
METHOD OF SUBSCRIPTION
Each person desiring to purchase Units must execute a Subscription Agreement
in the form provided. The Subscription Agreement must be submitted together
with a check payable to Rocky Mountain Internet, Inc. 1099 18th Street, 30th
Floor, Denver, CO 80202, in the amount of $4.00 per Unit to which the
subscription relates, with a minimum of 12,500 Units or $50,000.
QUALIFICATIONS OF PURCHASERS
An investment in Units involves a high degree of risk and is suitable only
for persons of substantial financial means that have no need for liquidity in
their investments. Accordingly, this offering is being made only to a
limited number of Accredited Investors (as that term is defined in Rule 501
of Regulation D promulgated under the 1933 Act) that purchase Units without a
view to public distribution or resale. Rule 501 defines Accredited Investors
to include certain types of institutions and individuals with a net worth in
excess of $1,000,000 or expected income for the current year, plus actual
income for the two prior years, of $200,000 (or $300,000 together with
spouse). In order to assure the Placement Agent and the Company of a
prospective purchaser's suitability to purchase Shares, each prospective
purchaser will be required to make certain representations by executing and
delivering the form of Subscription Agreement provided with this Offering
Memorandum.
Each person desiring to purchase Units also will be required, among other
things, pursuant to the terms of the Subscription Agreement, to (i) agree not
to sell or transfer any Unit or components thereof at any time or to any
person if such sale or transfer would violate applicable federal or state
securities laws; (ii) represent that such person is an Accredited Investor;
(iii) represent that (a) such person can bear the economic risk of the
purchase of Units including the total loss of
Exhibit 10.11 Page 22
<PAGE>
such person's investment; and (b) such person has sufficient knowledge and
experience in business and financial matters as to be capable of evaluating
the merits and risks of an investment in Units; (c) represent that such
person is purchasing Units for such person's own account without a view to
public distribution or resale; and (d) such person understands that such
Units may not be sold or transferred without registration under the Act and
therefore may need to be held indefinitely. Each subscriber also may be
required to provide current financial and other information to the Placement
Agent and the Company to enable them to determine whether such subscriber is
qualified to purchase Units.
In addition, subscribers will be required to represent that they are not
affiliated or associated with an NASD member broker dealer.
RESTRICTIONS ON TRANSFER OF UNITS
The Units will not be registered under the 1933 Act or the securities laws of
any state and are being offered and sold in reliance on exemptions from the
registration requirements of such laws. There will be restrictions imposed
by the applicable federal and state securities laws upon the resale or
transfer of the Shares except by gift, bequest or operation of law. The
Units will be "restricted securities," as defined in Rule 144 promulgated by
the Securities and Exchange Commission, and must be held indefinitely unless
they are subsequently registered by the Company under the 1933 Act and any
applicable state securities laws or unless, in the opinion of counsel
satisfactory in form and substance to the Company, they may be sold in a
transaction which is exempt from the registration requirements of such laws.
OFFERING TERMS SUBJECT TO MODIFICATION
The Company and the Placement Agent reserve the right to cancel or modify
this offering, to reject subscriptions for Units in whole or in part, to
waive conditions to the purchase of Units and to accept a limited number of
investors at less than the minimum subscription.
ADDITIONAL INFORMATION
Prior to the consummation of this offering, the Company will make available
to each prospective investor the opportunity to ask questions and receive
answers concerning the terms and conditions of this offering and to obtain
any additional information that the Company may possess or can obtain without
unreasonable effort or expense that is necessary to verify the accuracy of
the information furnished to such prospective investor. No other person has
been authorized to give information or to make any representations concerning
this offering, and if given or made, such other information or
representations must not be relied upon as having been authorized by the
Company or the Placement Agent.
Exhibit 10.11 Page 23
<PAGE>
Glossary
Backbone A centralized high-speed network that connects
smaller, independent networks.
Bps Bits per second. A measure of digital
information transmission rates.
Dial-up Accounts Accounts with an Internet connectivity provider
that utilize a telephone call to a modem rather
than a dedicated data line.
E-mail Electronic mail. An application that allows a
user to send or receive text messages to or from
any other user with an Internet address, commonly
termed an E-mail address.
Firewall A gateway between two networks that buffers and
screens all information that passes between the
networks.
FTP File Transfer Protocol. A protocol that allows
file transfer between a host and a remote
computer.
Graphical User Interface A means of communicating with a computer by
manipulating icons and windows rather than using
text commands.
High Speed Account Account with an Internet service provider that
utilizes a dedicated telephone call to a modem
rather than a dedicated data line.
Internet A worldwide network of computer networks that are
interconnected at certain points and utilize a
common communications protocol, TCP/IP.
Kbps Kilobits per second. A measure of digital
information transmission rates. One kilobit equals
1,000 bits of digital information.
LAN Local Area Network. A network designed to
interconnect personal computers within a localized
environment.
Mbps Megabits per second. A measure of digital
information transmission rates. One megabit equals
1,000 kilobits.
Mosaic A publicly available World Wide browser.
On-line Service Providers Commercial information services that offer a
computer user access through a modem to a
specified slate of information, entertainment and
communications menus. These services are
generally closed systems and many offer limited,
if any, Internet access.
Exhibit 10.11 Page 24
<PAGE>
POP Point-of-Presence. An interlinked group of
modes, routers and other computer equipment,
located in a particular city or metropolitan area,
that allows a nearby subscriber to access the
Internet through a local telephone call.
Shell Account An account in which the use is provided indirect
access to the Internet through a host computer
provided by the Internet connectivity provider.
SLIP Serial Line Interface Protocol. A communications
protocol that allows direct, dial-up access to the
Internet over phone lines.
T-1 A data communications line capable of transmission
speeds of 1.54 Mbps.
T-3 A data communications line capable of transmission
speeds of 45 Mbps.
Telnet An Internet application that allows a user to log
on to remote computers in order to access programs
and applications.
TCP/IP Transmission Control Protocol/Internet Protocol.
A compilation of network- and transport-level
protocols that allow computers with different
architectures and operating system software to
communicate with other computers on the Internet.
UNIX A computer operating system developed at Bell
Laboratories in the early 1970s that is highly
modular and flexible.
WAN Wide Area Network. A communications network which
connects geographically dispersed users.
Windows A computer operating system developed by Microsoft
that provides a graphical user interface an
multitasking capabilities.
Winsock An industry standard programming interface
definition for Windows which specifies how
TCP/IP-based network applications should
communicate with TCP/IP protocol software.
Winsock has been adopted by most vendors of
network protocol software and network applications
software Windows.
World Wide Web ("Web") A network of servers that uses a special
communications protocol to link different servers
throughout the Internet and permits communication
of graphics, video and sound.
Exhibit 10.11 Page 25
<PAGE>
EXHIBIT A
10KSB
EXHIBIT B
10QSB
EXHIBIT C
Prospectus
EXHIBIT D
Articles and Bylaws
EXHIBIT E
Warrant
EXHIBIT F
Registration Rights
EXHIBIT G
Subscription Agreement
Exhibit 10.11 Page 26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 439,299
<SECURITIES> 576,918
<RECEIVABLES> 652,834
<ALLOWANCES> (39,899)
<INVENTORY> 29,260
<CURRENT-ASSETS> 1,688,784
<PP&E> 3,592,268
<DEPRECIATION> (767,871)
<TOTAL-ASSETS> 5,137,030
<CURRENT-LIABILITIES> 3,475,006
<BONDS> 0
0
250
<COMMON> 4,880
<OTHER-SE> 5,505,075
<TOTAL-LIABILITY-AND-EQUITY> 5,137,030
<SALES> 203,586
<TOTAL-REVENUES> 2,849,371
<CGS> 161,128
<TOTAL-COSTS> 1,088,393
<OTHER-EXPENSES> 3,951,608
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 191,477
<INCOME-PRETAX> (2,367,808)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,367,808)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,367,808)
<EPS-PRIMARY> (0.477)
<EPS-DILUTED> (0.477)
</TABLE>
